Despite the dollar’s rise in strength over the course of 2009, the global consensus is that it is on a structural decline, and some see that as a “symbolic proxy for the long-term decline of the US economy,” according to a recent report by McKinsey.

The report, The almighty dollar in 2025, looks at the status of the dollar as the world’s preeminent reserve currency and considers whether it will retain that status in 2025.

The greatest competition comes from the euro, the Japanese yen and the Chinese yuan, but all of these currencies have their own problems, not least of which is the dire fiscal outlook in Europe and Japan. While the Chinese economy continues a decades-long growth spurt, its closed capital account, questionable banking system, embryonic legal system, rudimentary capital markets and “less-than-independent central bank” mean it also has a long way to go before taking the crown from the dollar.

On top of this, it is not at all clear that the central banks controlling these currencies have any intention of, or see any benefit in, raising their currencies’ role to that of principal reserve status. Instead, focus is being placed on the IMF’s Special Drawing Right (SDR) playing a role as a reserve. It is simply a composite of the world’s top five currencies, but talks are still in early stages.

The report concludes: “In 2025, the most likely scenario is that the dollar is still the star of the show, but will have to share the stage and the limelight with several other performers. The United States could still stumble, but it’s unclear whether the dollar rivals will have the capacity and the willingness to take over the lead role.”

Read more:
‘The almighty dollar in 2025’, What Matters by McKinsey Digital, 13 January 2010
© McKinsey & Company