China's currency yuan is expected to become an important global reserve currency, although it will not challenge the U.S. dollar's dominant role in the international monetary system, said a U.S. economist on Wednesday.
In the short term, the U.S. dollar's status in the world remains unrivaled, but in the long run, there would be a different picture if the U.S. economy fails to support its global privilege, Barry Eighengreen, professor of Economics and Political Science at the University of California, Berkeley, said at a book discussion event at the International Monetary Fund (IMF) in Washington.
The dependence on dollars by banks, corporations, and governments around the world is a source of strength for the United States, said the financial historian, also the author of a new book entitled Exorbitant Privilege -- The Rise and Fall of the Dollar and the Future of the International Monetary System.
However, recent events have raised concerns that this may soon be a privilege lost, he said.
With the latest financial crisis and the rise of the emerging market economies, noticeably China, America no longer towers over the global economy, said the professor.
Eighengreen projected that in about ten years, there would be three major global reserve currencies, including the U.S. dollar, which will account about 50 percent of the global share; Euro will account 30 percent; and Chinese yuan, also known as RMB, account 15 percent.
The dollar will lose its international currency status, Eichengreen warns, if the United States repeats the mistakes that led to the financial crisis and if it fails to put its fiscal and financial house in order.
The greenback's fate hinges, in other words, not on the actions of the Chinese government but on economic policy decisions in the U.S., he added.
According to U.S. Treasury Department, the world's largest economy has been running more than 1-trillion-dollar federal government deficit for three consecutive years. U.S. debt to GDP ratio is about 8.6 percent currently. More and more people within the United States worry about the country's fiscal sustainability, which in turn will have negative impact on the dollar's future.