Can the US dollar be dethroned as the world's primary currency?

Network effects favour the greenback but trade invoicing in Chinas renminbi has risen and could slowly emerge as a rival

- NIRANJAN RAJADHYAKSHA

here isa famous quip attributed to economist Simon Kuznets that there are four types of countries: developed, underdeveloped, Japan and Argentina. Argentina got a special mention since it isuniqueasa country that was once way ahead in the development game but then went in the opposite direction after 1950. Japan—and subsequently many other Asian countries—managed to travel in the right direction over the same period.

Argentina isalso known to suffer from periodic macroeconomic crises. There is one unfolding in Argentina right now. The US government has offered a swap line of $20 billion to help Argentina manage yet another run onits currency. This decision has sparked a lot of snarky remarks about how Argentine president Javier Milei needs government intervention to keep his free-market agenda alive. Much of this criticism is unfair.

Yet, there could also be another factor driving the decision of the US government to offer a lifeline to Argentina, one that seems based ona geopolitical calculation. It is apparently based on what happened during an earlier episode ofa severe dollar shortage—in 2023.

In that year, Argentina was once again battlinga run onits currency. The country expanded a swap line with the People's Bank of China. Over the next few months, the use of China’s renminbi (the official name of its currency with yuan asits unit of account) as the preferred currency for trade invoicing shot up, and at one point became bigger than the US dollar.