The Dollar’s Exorbitant Privilege Is Threatened by a Massive Power Conflict

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The majr conflict between great powers is putting the dollar’s exorbitant privilege under threat. The U.S. dollar has been the world’s dominant currency since World War II. Its status has been reinforced in recent years through various factors, including the U.S.

Treasury yields, economic growth, and the relative stability of the U.S. economy compared to other advanced economies worldwide.

However, this privileged status is now at risk due to geopolitical tensions between great powers such as China and the United States that have created unease among investors and shaken their confidence in the greenback’s safety and soundness as a reserve currency. These tensions are causing some central banks to diversify their foreign currency reserves away from U.S. dollars and into other currencies, including the Chinese yuan.

China’s increasing economic power and growing international presence have also accelerated this trend towards reduced reliance on the dollar as a reserve currency; as Chinese President Xi Jinping stated recently: “We want our yuan to be part of global trade and investment systems”.

Trade tensions between the two countries have also led to retaliatory tariffs and disruptions in global supply chains. Such disruptions have damaged economic growth prospects for both countries, further eroding investor confidence in the dollar’s safety and soundness as a reserve currency. This trend has been accelerated by China’s increasing economic power and growing international presence.

Furthermore, other great powers like Russia actively challenge traditional Western-dominated financial systems with alternative payment networks like SWIFT. These networks offer an alternative to U.S.-dominated payment systems that allow countries to bypass U.S.-imposed sanctions without sacrificing.

The US Treasury is the largest marginal borrower in the world, and its borrowing habits significantly impact the global financial system. Finance is about marginal flows, meaning that even small changes can have significant impacts. The recent rise in great power conflict has caused investors to become uneasy and move away from investing in U.S. dollars due to its uncertain status as a reserve currency.

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