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Will Central Bank Digital Currencies Doom Dollar Dominance?

Some say that issuance of central bank digital currencies will transform the international monetary status quo by eroding the US dollar’s dominance of cross-border payments and greatly reducing transaction costs. But this is not going to happen.

BERKELEY – August 13-15 marks the 50th anniversary of “the weekend that changed the world,” when US President Richard Nixon suspended the dollar’s convertibility into gold at a fixed price and rung down the curtain on the Bretton Woods international monetary system. The subsequent half-century brought many surprises. From a monetary standpoint, one of the greatest was the dollar’s continued dominance as a vehicle for cross-border transactions.

Under Bretton Woods, the dollar’s supremacy was readily explicable. America’s financial position coming out of World War II was impregnable. Changes in the price at which dollars could be converted into gold were unthinkable, first because of that financial strength and then, as the country’s monetary position weakened, because of the possibility that one devaluation would create expectations of another.

Many thought that Nixon’s move would diminish the dollar’s international role. With the currency fluctuating like any other, it would be too risky for banks, firms, and governments to put all their eggs in the dollar basket. They would thus diversify by holding more reserves and conducting more transactions in other currencies.

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Correction Aug 12, 2021 07:04UTC

This commentary previously misstated the exact (but still unworkably large) number of agreements that would be needed to accommodate bilateral arrangements among 200 separate currency issuers.