The U.S. dollar's status as the global reserve currency may weaken due to the war between the United States and Iran, but the Chinese yuan is unlikely to replace it, according to a former senior IMF official.
Lee Jae-woo, former deputy director of the International Monetary Fund's Research Department, addressed the war's impact on the dollar in a recent interview with The Seoul Economic Daily in Washington, D.C. "The direction is clearly toward a weakening of the dollar's status," he said. "Many factors that undermine its reserve currency status are unfolding on all sides, including the massive U.S. fiscal deficit and moves away from serving as the world's policeman." He added, "Even if the U.S. and Iran reach a deal around this summer and oil prices stabilize next year, the influence of the United States, which has played a pivotal role in the global economic and security order, will weaken in the process."
Still, he pointed out, "There would need to be an alternative, but there isn't a suitable one. For the yuan, capital market liberalization must come first. The yuan's share in international transactions remains low." He cited the rise in the dollar's value following the outbreak of the war as a clear example. "If you asked whether the dollar will be pushed out as the reserve currency within five years and replaced by another currency, no one would be able to answer yes with strong conviction," Lee said.
Lee predicted that this war would deliver a harder blow than the 1970s oil shock. "During the first oil shock in 1973, oil-producing countries benefited from rising oil prices," he recalled. "They earned substantial revenues and lent money to other countries, contributing to easier international financial conditions." He assessed, "In the past, only oil-importing countries suffered damage, but now oil-producing countries are also being hurt, so the impact on the global economy will be worse."
Lee earned his Ph.D. in economics from the Massachusetts Institute of Technology (MIT) in 1992 and served as an assistant professor at the University of California, Irvine, before joining the IMF in 1998. From 2011 to 2015, he worked in Seoul as chief economist for Korea at Bank of America Merrill Lynch, then returned to the IMF and retired this past March.
