Why the dollar will lose its position in the global market

The relative decline of the US share in world GDP in recent years creates more and more talk about the declining role of the dollar in the global financial system and a decrease in its value as the main reserve currency. These predictions and fears are supported by statistics on the state of the balance of payments of the United States and of the state budget.

The leading position that holds the dollar in the global financial system, reflect the place, which over the last several decades was occupied by the US economy in the world – and continues to remain, if the GDP of different countries translated into U.S. dollars at current rates. However, for more adequate comparison of the size of economies of different countries it is advisable to use courses of purchasing power parity (PPP). If the GDP of different countries to convert to U.S. dollars at exchange rates PPP and expressed in constant $ 2011 (as does the world Bank), we can see that by the end of 2017, the USA is the largest economy in the world. The country accounts for only 15% of world GDP, while China’s share is 18% and the nearest competitor – the Eurozone – about 11%.

Disappointing statistics

Since the early 1980-ies US fall into a situation of chronic current account deficit of the balance of payments. For several decades this situation has led to the fact that such an important indicator of foreign economic health of a country as the net international investment position became negative and mid-2018, amounted to 44,5% of US GDP. In turn, chronic deficits at both the Federal and regional budgets broke up the total US national debt in 2017 to about 105% of GDP.

Prospects for further expansion of government deficits and the current account of the balance of payments gives rise to legitimate concerns. As a result of recent tax reform in the United States, designed to stimulate economic growth and facilitate the return of previously extracted for the production boundary, the tax revenues of the state budget is expected to be reduced, which will lead to an increase in borrowings. According to analysts Citi, the deficit of the state budget of the USA will grow from 3.8% of GDP in 2017 to 5.2% of GDP in 2018 and to 6.2% of GDP in 2019. The national debt in 2019 will reach 108% of GDP.

While maintaining a stable amount of excess private savings over private investment increase in government budget deficit leads to a deterioration of the balance on current accounts. Citi analysts believe that the current account deficit of the balance of payments of the United States will grow from 2.3% of GDP in 2017 to 2.4% of GDP in 2018 and to 3% of GDP in 2019. By 2022 this figure, according to analysts Citi, could reach 3.7% of GDP.

As we can see, the future balance of payments statistics and the public sector does have a positive impact on the current status of the us dollar as the dominant currency. In this context, Citi analysts forecast a long-term decline of the dollar. The DXY dollar index is expected to decline from current values in the district 96 points to 93.9 points by the end of 2018 and by the end of 2023, he can go down to 76 points (which is equivalent to a decrease of 20% relative to current levels).

The new leader

Will the decline of the dollar to reduce the current account deficit of the balance of payments of the United States and reverse the downward trend in the net international investment position? This question is debatable. You need to calculate how increase exports, and as reduced US imports as a result of the devaluation of the dollar, how this situation will behave domestic consumption.

In any case, the marked devaluation of the dollar in real terms will require significant adaptation of the US economy to new external conditions. In turn, international investors, both private and public (including Central banks and financial authorities) will have to change their approaches to the formation of reserves. It is possible that the share of the dollar in the international financial system in General and in the international reserves in particular will gradually decline, while the share of peers gradually increase.

If you pay attention on the Euro zone financial indicators of this region are quite optimistic that it can maintain interest in the Euro as a reserve currency. By the end of 2017, the current account balance of the region was positive and amounted to 3.2% of GDP. The budget deficit of the Eurozone in 2017 amounted to only 1% of GDP and the primary budget balance (before interest payments on debt) was positive 1% of GDP.

In this situation, the Citi analysts predict a gradual decline in the total debt of the Eurozone from the current levels of around 87% of GDP to 83% of GDP by the end of 2019. Some concerns from market participants, however, is Italian politics. However, at present it is difficult to imagine that Rome will go to the organization of a referendum concerning your stay in the Eurozone. Thus, the interest in the Euro as a reserve currency of the modern world may well increase.

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