CBO, Report:  The U.S. Dollar as an International Currency and Its Economic Effects

“In CBO’s view, the euro and the renminbi are the two currencies most likely to displace the dollar as the primary international currency, but neither is likely to overtake the dollar over the coming decade.55 The main obstacle for the euro is that the euro zone’s economic importance in the global economy (relative to the importance of the United States) is expected to wane. Currently, nominal output in the euro zone (measured in dollar terms) is roughly two-thirds the size of U.S. nominal output. According to CBO’s projections, that gap is expected to widen over time as the United States grows at a faster pace than the economies of the euro zone (see Figure 9). Because economic output in the economies of the euro zone is unlikely to overtake U.S. output, it is similarly unlikely for the international use of the euro to exceed the dollar’s use over the next 10 years and beyond. Furthermore, the euro zone’s limited banking union (without a common deposit insurance program) introduces an additional risk to the euro zone’s financial system that is not as apparent in the financial system of the United States. As a result, CBO projects that international use of the euro is likely to stagnate over the coming decade.”

“In contrast, real output in the Chinese economy is likely to overtake real output in the United States by the end of the decade, CBO projects, although a number of obstacles may impede the transition from the dollar to the renminbi.56 The most important of those obstacles are the capital controls imposed by the Chinese government that inhibit the purchase and sale of renminbi and renminbi-denominated assets. Restricting transactions in renminbi and Chinese assets limits the ability of the renminbi to function as a useful medium of exchange. In addition, legal protections for international investors are not as strong in China as they are in most developed economies. Weak legal protections may also limit the renminbi’s ability to function as an international store of value. Consequently, CBO projects that the renminbi’s use internationally will grow only gradually over the next 10 years. Although material changes in Chinese policies do not appear likely in the near term, international use of the renminbi could grow at a faster pace if China opened its capital markets and improved investor protections.”

“The long-run outlook for the dollar is less clear. If China opened its capital markets and bolstered investor protections, it seems possible for the renminbi to overtake the dollar as the primary international currency sometime in the next three decades. Alternatively, if China did not enact those reforms, emergence of the renminbi as an international currency might stall (as did the rise of the yen in the 1980s). Over the long run, a multipolar international monetary system could arise in which multiple regional currencies are in use simultaneously without the emergence of a primary international currency.57 In that scenario, the use of the dollar would continue to erode gradually over time in parallel with the shrinking U.S. share of the global economy. That scenario presumes that no major economic event takes place that might strengthen or weaken the international use of the dollar. For example, a world war or a severe financial crisis in the United States would probably have large and unpredictable implications for the projected path of the dollar over time.”