Shine Trader Limited reports:
Federal Reserve economists Carol Bertaut, Bastian von Beschwitz and Stephanie Curcuru write in their new paper, “The International Role of the Dollar,” that private digital currencies like Bitcoin and Ether, as well as government-backed digital currencies, Could reduce people’s reliance on the dollar.
They cite changes in consumer and investor preferences, while new products may alter the balance of expected costs and benefits. But the paper adds:
“Even so, technology alone is unlikely to fully offset the reasons for the dollar’s long-term dominance.”
The study comes as the Federal Reserve is expected to release another highly anticipated report soon on whether the US should issue central bank digital currency (CBDC).
But key Fed officials are divided. While Fed Chairman Jerome Powell has expressed some openness to the CBDC, other Fed officials, such as Vice Chairman Randal Quarles, have been more skeptical.
Quarles said in July that while public interest in the digital dollar had reached “fever pitch,” the dollar was already highly digital, an arrangement he said was “good for the country and good for the economy.”
Beyond digital currencies, the Fed economists’ study highlights other short-term challenges that could affect the dollar’s international standing.
One is the continued integration of Europe, a large economy with sound institutions and free trade. The economists pointed in particular to the European Union’s decision to issue jointly guaranteed bonds at the height of the pandemic.
If Fiscal integration in Europe progresses and a large, liquid EU bond market emerges, the euro could become more attractive as a reserve currency. This consolidation could be accelerated by strengthening the EU’s sovereign debt market infrastructure and introducing a digital euro.
Still, Fed economists think the dollar will remain attractive. They wrote:
“In the absence of any large-scale political or economic changes that undermine the value of the dollar as a store of value or medium of exchange… “The dollar is likely to remain the world’s dominant international currency for the foreseeable future.”
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