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Is the global hegemony of the US dollar under threat?

Barry Eichengreen

Barry Eichengreen:

  • professor of economics at the University of California at Berkeley, former senior policy adviser to the International Monetary Fund,

  • author of many books, including In Defense of the Public Debt (Oxford University Press, 2021).

Usually, changes in the international monetary and financial system occur gradually. This is quite suitable for characterizing the evolution of the financial system over the past 20 years. Since the beginning of the century, the dollar's share of global foreign exchange reserves has been declining by about 0.5% per year. Central banks have added Canadian dollars, Australian dollars, Swedish krona and other non-traditional reserve currencies to their portfolios. As a result, the international monetary and financial system has become less dollar-oriented.

Could there be a sharp transition from the dollar, for example, to the Chinese yuan? In modern history, we have already seen a similar transition from the pound sterling to the US dollar once during the First World War.

This transition was driven by two factors:

  • Geopolitical turmoil disrupted business in the fiat currency. Wartime needs forced the British government to resort to capital controls and currency exchange.

  • An alternative to the pound sterling emerged after the Federal Reserve Act created the US central bank to provide liquidity to the dollar markets.

Today is another geopolitical problem . The US has frozen most of Russia's central bank reserves, prompting other central banks to consider abandoning the dollar. Another necessary condition for such a transition, namely the existence of an alternative, is absent.

Countries cannot switch to the euro or yen as Europe and Japan cooperate with the US in applying sanctions. Markets in China are still limited in terms of liquidity and accessibility. In addition, the country's reserve managers will in any case hesitate to place their assets in the territory of authoritarian China.

Barry Eichengreen expects not a sharp, but a gradual weakening of the global hegemony of the dollar.

Şebnem KalemlI-Özcan

Shebnem Kalemli-Ozkan:

  • former Senior Policy Adviser, International Monetary Fund,

  • professor of economics at the University of Maryland, College Park.

Economic sanctions against Russia include the militarization of the US dollar and call into question the global hegemony of the dollar. In the absence of viable alternatives , the dollar is unlikely to be overthrown anytime soon .

The alternative dominant currency should play as big a role in global trade and finance as the dollar currently does. The euro and yuan are important trading currencies, but they play a lesser role in global finance. Strong spillovers in emerging markets from US monetary policy - but not from the monetary policies of other advanced economies - are a clear indication of the dollar's important role in global capital flows.

The alternative also needs to be a safe asset so that central banks are willing to hold their reserves in bonds denominated in that currency. Now central banks hold most of their reserves in dollars, followed by the euro. Can the euro replace the dollar and become the next reserve currency? Shebnem Kalemli-Ozkan doubts this. Euro is a safe asset. The absence of a pan-European government limits the issuance of euro-denominated government bonds compared to US Treasury bonds.

The yuan also does not claim to be the world's reserve currency:

  • is not fully convertible,

  • unsupported by democratic institutions and the rule of law.

Chinese capital controls make it virtually impossible for the yuan to play a larger role in global capital flows and serve as a reserve currency. After blocking the dollar reserves of the Russian central bank, many countries have a strong desire to reduce the excessive role of the dollar.

Paola Subacchi

Paola Subacchi:

  • Professor of International Economics at the Queen Mary Institute for Global Policy at the University of London,

  • author of The Value of Free Money (Yale University Press, 2020).

The death of the dollar has been greatly exaggerated for the following reasons:

The dollar is the most used currency

  • In international trade, about 80% of export invoices are issued in dollars.

  • In international banking, about 60% of international and foreign exchange obligations and claims are denominated in dollars.

  • 60% of the world's foreign exchange reserves are held in dollars.

  • 64% of government debt in foreign currency is denominated in dollars.

The dollar has no serious alternative

The Euro is the second most exchangeable and liquid currency in the world. The scope of its application is mainly regional:

  • 66% of trading accounts in Europe are issued in euros,

  • only 21% of the world's foreign exchange reserves are held in euros.

Other international currencies that determine the value of the special drawing rights of the International Monetary Fund - the yen, the British pound and the yuan - occupy an insignificant place in official foreign exchange reserves. The yuan accounts for 2.4%.

Yuan - limited international currency

China has the world's second largest economy and extensive international trade links. The internationalization program for the yuan has resulted in 30% of the currency being used in China's trade. Capital controls limit the liquidity of the yuan and its international circulation.

China continues to depend on the dollar system. It has the largest dollar holdings of any country outside the US, with over $3 trillion in foreign exchange reserves alone. China's bilateral loans are mostly dollar-denominated, as is capital from the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB).

While the dollar is far from replacing or even debasing its status internationally, this does not make the current international monetary system any more stable. China's reliance on the dollar is a puzzle inherent in the dollar system and an inherent element of instability. Due to the fragmentation of the world economy, the risk of owning a global public good in the form of US currency has significantly increased.

Yu Yongding

Yu Yongding:

  • former President of the China Society for the World Economy,

  • Director of the Institute of World Economy and Politics at the Chinese Academy of Social Sciences,

  • From 2004 to 2006, he worked at the Monetary Policy Committee of the People's Bank of China.

Hegemony is a geopolitical concept , and should not be used to characterize the status of the US dollar. After the abandonment of the gold standard at Bretton Woods, the position of the dollar as the dominant international currency rather strengthened.

The main reasons for the strengthening of the dollar after Bretton Woods:

  • confidence in the integrity of the dollar has not been fundamentally shaken,

  • the rest of the world needed the dollar, despite the lack of conversion into gold,

  • this currency was a stable standard for denoting the value of goods and services, an easily accessible medium of exchange, and a reliable store of value.

The main contradiction in using the dollar as a reserve currency is that the US must run a current account deficit to provide dollars to the rest of the world. The more the dollar is backed, the weaker it will be as a medium of international payments and as a reserve currency.

It's still Triffin's paradox :

  • The dollar cannot survive as the world's reserve currency without requiring the US to run ever-increasing deficits.

  • A rise in the exchange rate of a popular reserve currency harms the export of the currency issuing country and leads to a trade deficit.

  • A country issuing a reserve currency must strike a balance between its own interests and responsibility for making monetary decisions that are beneficial to other countries.

  • Another reserve currency replacing the dollar would increase the cost of borrowing, which could affect the US ability to repay debts.

  • A new international monetary system could potentially help countries maintain their reserve currency status.

The accumulation of foreign exchange reserves by developing countries keeps the dollar undeservedly strong. But the situation may change. The current militarization of the dollar will hasten its decline as the dominant international reserve currency. However, the network effect means that the overthrow of the dollar is a long-term process. No one knows when the final reckoning will come.



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