[ad_1]
“Every night I wonder why all countries have to base their trade on the dollar,” Brazilian President Luiz Inácio Lula da Silva asked last week during a state visit to China. It’s a question on the minds of many national leaders, particularly as global trade fragments between the US and Chinese spheres, and as countries assess exposures to Western sanctions and the US economy. While paranoia about the dollar’s sticking power is growing among some in Washington, it shouldn’t keep them up at night. The disappearance of the dollar is greatly exaggerated.
Since the 1944 Bretton Woods agreement instilled the dollar as the de facto global currency, its dominance has been maintained thanks to the United States’ status as the world’s greatest economic and geopolitical power. Just under 60 percent of official foreign exchange reserves are held in currency. It is the currency of choice for international trade and accounts for more than four-fifths of trade finance and half of trade invoices. It also dominates the currency and debt markets. This creates a high demand for dollars, allowing the US to borrow at a lower cost. To usurp these network effects is not easy.
It is true that there are threats to the dollar. As Chinese trade and borrowing have expanded in recent years, the use of the renminbi has increased. Its share of the trade finance market has more than doubled in a year to 4.5 percent now, just shy of the euro’s share. Much of this is related to increased trade with Russia, as last year’s sanctions cut Vladimir Putin off from the Western financial system. But, with China’s share of global trade in goods now around 15 percent, the renminbi’s reach will expand. Prior to Lula’s visit, China and Brazil agreed to liquidate trades in each other’s currencies, reflecting their growing mutual trade. France also recently conducted its first liquefied natural gas sale in renminbi
United States Secretary of the Treasury, Janet Yellen warned sunday that Western economic sanctions on Russia could also undermine the hegemony of the dollar. More nations may be scared into considering alternatives to dollar-based financing to mitigate their threat. putin has already promised use the renminbi more. For others, diversification also makes economic sense. Many emerging markets are increasingly frustrated with the dollar’s grip on their economies, from the recent banking turmoil to the US Federal Reserve’s historic rate hikes, which have increased borrowing. ASEAN members are exploring how to promote the use of local currencies in their bilateral trade.
But these threats to the supremacy of the dollar lack power. While renminbi-backed trade may pick up, the currency still only accounts for about 3 percent of central bank reserves. The dollar’s eminence is bolstered by its enormous liquidity, America’s openness to trade and investment, and confidence in its supporting institutions. China’s financial system, by contrast, is less developed, its currency is not fully convertible due to capital controls, and it lacks true rule of law. Global economic activity is still dominated by the US and its allies, making it difficult to avoid the dollar. The biggest threat may come from central bank digital currencies, which can provide more efficient ways to settle transactions. America is finally waking up to this danger, but should speed up efforts to digitize the dollar.
Since there is no viable alternative to replace it, the rumors about the dollar falling are exaggerated. This means that the biggest risk to the coin could ultimately come from unforced errors. Reinforcing confidence in the US financial system after the recent banking turmoil and, above all, avoiding a debt ceiling crisis are vital. It is important to guard against complacency; after all, the British pound sterling was once the dominant currency.
[ad_2]
