One of the big scares out there is there will be a shift away from the U.S. dollar into the Chinese Yuan, and this shift will drive U.S. interest rates dramatically higher. Here’s the Economist throwing in a rather silly statement:
“The good news for the dollar is that the Chinese yuan is not yet widely accepted and suffers from higher inflation, reducing its usefulness. But a shift in the world’s reserve currency could be swifter than many assume.”
This is simply silly. A multi-trillion real value shift can’t happen quickly. The United States still has a huge proportion of valuable real assets. Foreigners want access to those [assets], and that involves getting U.S. dollars at some point. The value of the dollar is tied to the getting access to U.S. markets.(Note: changed access to assets for clarity)
There is some good discussion in the comments, but I want to highlight a wonderful paper on this subject by David Fields and Matias Vernengo titled Hegemonic Currencies during the Crisis: The Dollar versus the Euro in a Cartalist Perspective (http://www.levyinstitute.org/publications/?docid=1374). The authors initially offer an introduction to money, comparing the Metallist versus Cartalist approach. Although debate about the historical creation of money continues, currently:
Money derives its properties from the state’s guarantee, and the monetary authority ensures the creditworthiness of the state by keeping its fiscal solvency.6 In its own domestic currency the national state is essentially always creditworthy, and default is impossible, since the central bank can always buy government bonds and monetize the debt. (p. 6)With concerns of solvency removed from the equation, the authors move on to the fear of unsustainable trade deficits:
There is no balance of payments constraint for the hegemonic country and the principles of functional finance apply on a global basis. (p. 6)Having alleviated these fears about the fall of the dollar, Fields and Vernengo conclude
It is the power to coerce other countries that is central for monetary hegemony. (p. 7)While China’s remarkable growth has no doubt increased its ability to coerce other countries, it remains nowhere close to matching the US. Current economic struggles in both China and Europe further reduces the likelihood that any nation (or union) will challenge the US global position in the near future. The US dollar looks set to remain the monetary hegemony for the foreseeable future.