Many economists agree that China is likely to become the successor of the United States as the strongest economic superpower in the world. Along with the emerging ascendancy of Chinese economy is the strengthening of the forex position of the yuan. Some even speculate that the Chinese currency may soon replace the US dollar as a strong international currency commonly used as a standard reserve and safe-haven asset.

There are several indicators that the US dollar is losing its status as a safe-haven asset. The recent credit downgrading of Greece, for instance, has again sent chills in the financial markets. Many investors are again beginning to worry that the possibility of defaulting on sovereign debts could spread in the eurozone. The fear of financial collapse in the eurozone would have immediately led to the weakening of the euro in the forex market. The US dollar, on the other hand, would have already rallied against the euro as investors took flight from potentially volatile investments.

Despite of the renewed market worries about the eurozone, the foreign exchange value of the euro remains strong against the dollar. The recent credit rating downgrade of Greece also has not prompted investors to take refuge in the safe-haven of the dollar and other dollar-backed assets.

It seems that at least in the near-term the prestige of the US currency has deteriorated as can be gleamed by the reactions of investors amid the sovereign debt issues in Europe and the ongoing political uncertainties in the Middle East.

People are wondering about the prospects of the US dollar. Those who desire to make money through the forex market may find it a bit unprofitable to buy US currency as it continues to decline. With the exception of spread-betting, the US dollar does not seem to be an attractive currency right now.

On the other hand, the weakness of the US dollar can be attributed to some ‘transitory’ factors such as the volatility of crude oil prices. Since the US dollar is being used as the invoicing currency for the international trade of oil, high oil prices would result in the depreciation of the dollar and vice-versa. The flight to ‘safe-haven’ assets has not helped the dollar simply because investors have considered the overdependence of the US economy on fossil fuel.

The so-called currency war might have already ended as many emerging economies have already given up the race to bottom as high inflation takes a foothold. Manipulating or intentionally devaluing currencies would have given competitive advantage for the nations involved but this competitive edge is not sustainable. Nations are risking domestic instability in favour of export competitiveness.

Of course, the forex weakness of the US dollar can also be attributed to the loose monetary policies of the Federal Reserve, which include the quantitative easing program and the very low interest rates. By over-flooding the markets with greater dollar liquidity, the purchasing power of the greenback was weakened in the process. If this trend continues, it will not be good for the US economy and the global economy in general simply because US dollar is considered as a global currency. Most countries have dollar reserves instead of gold reserves to back-up their economies.

On a long-term basis, the US dollar is still seen as the most stable currency and safe haven asset. There are still no competitors that can immediately topple the greenback.

However, it should be pointed out that nothing in this world last forever. Two major currencies have the potential of replacing the US dollar in the long run as a global reserve currency. The first one is the euro and the second one is the Chinese yuan or renminbi. These currencies may be considered as serious contenders but they still have a lot of hurdles that need to be overcome. The euro, for instance, is a regional currency that is technically a state-less currency. This means that the euro is on a shaky ground considering the diversity of the eurozone. Not unless, the eurozone becomes a United State of Europe, the euro will not have a strong guarantor in the forex market and global trade in general.

On the other hand, the other hand, the Chinese yuan is backed by a very strong state that has almost complete control on the foreign exchange value of the said currency. A non-free-floating currency is not ideal for reserve and international trading purposes.

Even if the euro and the yuan overcome their respective disadvantages, the US dollar will not easily lose its ascendancy. Some analysts speculate that there might be a future wherein there will be three ‘reserve’ currencies. This is far better than simply having just one international reserve currency because the values of these currencies are likely to become very stable and harder to manipulate.