The US dollar is weakening, and the Federal Reserve cannot escape blame! But why is there still no fiat currency that can replace it?

Recently, the US dollar index (DXY) has weakened, sparking renewed discussions in the market about the "end of dollar hegemony." However, according to analyses from the Mises Institute and several economic observers, these claims of "the dollar is dead" are greatly exaggerated, as one key question remains unanswered: What is the alternative to the dollar?

The weakness of the dollar is one of the driving forces behind the Federal Reserve's policy

U.S. Dollar Index Trend: As of August 26, it was reported at 98.44, although lower than the average of 100.0 during Biden's administration, it is still higher than the 93.15 during Obama's era.

Reason Analysis:

The Federal Reserve's maintenance of high interest rates has led to an increase in the hedging costs for international investors purchasing U.S. bonds.

The decline in European interest rates has made euro assets more attractive despite the weak European economy.

The Federal Reserve is deliberately lowering the dollar by maintaining high interest rates to address inflation risks.

Why is there no other fiat currency that can replace the US dollar?

1. Euro: Debt Pressure and Policy Division

In 2025, a massive military and public spending plan will cause Germany's debt to reach 350% of GDP, while Spain's will reach 500%.

The lack of a unified fiscal policy and the digital euro project may strengthen central bank oversight.

2. Renminbi: Capital Controls and Legal Risks

The global trading share is only 4.5%.

Strict capital controls, currency manipulation, and state intervention have constrained investor confidence.

The Chinese government has no intention of eliminating these obstacles and therefore has no intention of becoming a global reserve currency.

3. Other Emerging Market Currencies (Brazil, Russia, India, South Africa)

Facing issues similar to capital controls and insufficient institutional transparency.

Gold and Bitcoin: Feasible as Value Storage, Not Feasible to Replace the Dollar

Gold: It has high tangibility and historical trust, but lacks liquidity, making it unable to support global trade and settlement.

Bitcoin: Fixed supply, decentralized, suitable as a hedge tool, but its volatility and supply constraints make it difficult to serve as a global reserve currency.

The Three Moats of Dollar Hegemony

1. Depth and Liquidity

The United States has the largest and most transparent capital market in the world, and U.S. Treasury bonds remain the preferred reserve asset for central banks around the world.

Nearly 90% of global foreign exchange transactions involve the US dollar.

2. Legal and Institutional Trust

A transparent legal system, strong property rights protection, and independent institutions have enhanced the global credibility of the US dollar.

3. Global Trade and Network Effects

54% of global export settlements are conducted in US dollars, far exceeding the euro (30%) and the renminbi (4%).

The commodity market is highly dollarized, with the US dollar accounting for over 48% of SWIFT payments.

The real threat comes from the United States itself

The greatest risk to the status of the US dollar does not come from external competition, but from internal fiscal deficits, trade deficits, and political disorder in the United States.

However, unless a currency emerges that can rival the US dollar in depth, trust, liquidity, and legal robustness, the dollar's status as the world's reserve currency will remain solid.

Conclusion

The US dollar has recently weakened, and the Federal Reserve's policy is indeed one of the driving forces, but this does not mean the end of the dollar's hegemony. In fact, the greatest advantage of the dollar is that there is no other fiat currency that can take its place.

In the world of fiat currencies, victory does not belong to the strongest, but to the least weak. As long as the fiscal, legal, and market structure issues of other currencies still exist, the dominance of the US dollar will continue.

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