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Paul Krugman says not to worry about the dollar weakening despite recent challenges to its dominance

paul krugmanNobel-winning economist Paul Krugman.

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  • Investors shouldn’t worry about the dollar losing its dominance anytime soon, according to Paul Krugman.
  • That’s despite recent currency challenges from countries like China, Russia, and Brazil.
  • “The dollar’s dominance isn’t under threat. And even if it were, it wouldn’t be a big deal,” the top economist said Friday.

Investors shouldn’t lose sleep over the recent focus on potential threats to the dollar’s dominance, according to top economist Paul Krugman.

The Nobel Prize-winning economist said Friday that he’s not expecting to see the greenback unseated as the major currency for international trade anytime soon – despite countries like Russia, China, and Brazil all cooking up potential challenges to it.

“No, the dollar’s dominance isn’t under threat,” Krugman wrote in a New York Times op-ed. “And even if it were, it wouldn’t be a big deal.”

The US has applied wide-ranging financial sanctions against Moscow since the invasion of Ukraine last year – prompting Russia and several other countries to work on dollar alternatives to reduce their reliance on the currency.

China is pushing for the yuan to replace the dollar in oil deals, while Russia and Iran are reportedly working together to develop a gold-backed stablecoin that could be used in international trade.

Brazil and Argentina could also team up to launch a joint currency that would serve as a South American equivalent to the euro, although Krugman has previously slammed the so-called “sur”.

“The idea seems to be that some regimes will turn away from the dollar to protect themselves against sanctions in the event they do something America disapproves of,” he said Friday.

“And so we have reports that China is trying to promote oil trade in yuan and Russia and Iran are considering creating a gold-backed cryptocurrency,” Krugman added. “And for some reason Brazil and Argentina are talking about creating a common currency along the lines of the euro, which is a really terrible idea.”

Krugman also noted that some of the chatter about the dollar’s potential decline had come from the rise of crypto.

Digital asset bulls have often proposed bitcoin as a future alternative to the greenback, although the token lost a lot of its shine last year when a combination of rising interest rates and the implosion of high-profile companies like FTX led to its price plunging over 60%.

“Where is the death-of-the-dollar buzz coming from all of a sudden? Some of it is coming from the crypto cult,” Krugman said. “Although cryptocurrencies have been around for many years and still haven’t come to play any significant role in legitimate business — not to mention the astonishing scale of the scandals that have plagued the industry — they’re still being hyped.”

But Krugman isn’t worried about any of those potential challenges to the dollar’s dominance.

He pointed out that when central banks have diversified their holdings away from the dollar in recent years, they’ve tended to favor small currencies like the Swedish krona and South Korean won over potential threats like the euro, Japanese yen, or bitcoin.

Krugman added that the main benefit the US enjoys from the dollar’s dominance is slightly discounted borrowing – which he called “ultimately trivial for what is, after all, a $26 trillion economy.”

“It’s hardly earth-shattering,” Krugman said. “Dollar dominance sounds important if you haven’t thought about it much, but much less so if you have. In fact, in general, the more you know about international currencies, the less important you think they are.”

Read more: King dollar’s worst slump in over a decade is hammering one of 2022’s biggest winners – but the greenback’s dominant run might not be over just yet

Read the original article on Business Insider