The writer is president of Rockefeller International
Today’s commentators overwhelmingly agree that a weakening US dollar cannot lose its status as the world’s dominant currency because “there is no alternative” on the visible horizon. Perhaps, but don’t tell that to the many countries rushing to find an alternative, and that complacency will only speed up their search.
The leading example right now is gold, up 20 percent in six months. The surge in demand is not being led by the usual suspects: investors large and small looking for a hedge against inflation and low real interest rates. Instead, the big buyers are central banks, which are slashing their dollar holdings and looking for a safe alternative. Central banks are buying more tons of gold now than at any time since data starts in 1950 and currently accounts for a record 33 percent of global monthly gold demand.
This buying boom has helped drive the price of gold to near-record levels and more than 50 percent above what models based on real interest rates would suggest. Clearly something new is driving gold prices.
Take a closer look at central bank buyers, and nine of the top 10 are in the developing world, including Russia, India and China. It is no coincidence that these three countries are in talks with Brazil and South Africa about creating a new currency to challenge the dollar. Their immediate objective: to trade with each other directly, in their own currency. “Every night I wonder why all countries have to base their trade on the dollar,” Brazilian President Luiz Inácio Lula da Silva said recently on a visit to China, arguing that an alternative would help “balance global geopolitics.”
Thus the oldest and most traditional of assets, gold, is now a vehicle for the central bank’s revolt against the dollar. Often in the past, both the dollar and gold were considered safe havens, but now gold is considered much safer. During the brief banking crisis in March, gold continued to rise while the dollar fell. The difference in the movement of the two has never been so great.
And why are emerging nations revolting now, when world trade has been based on the dollar since the end of World War II? Because the US and its allies are increasingly using financial sanctions as a weapon.
Shockingly, 30 percent of all countries now face sanctions from the US, EU, Japan, and UK, up from 10 percent in the early 1990s. Until recently, most targets were little ones. This group then launched an all-out sanctions attack on Russia for its invasion of Ukraine, cutting off Russian banks from the dollar-based global payment system. Suddenly it became clear that any nation could be a target.
Overly confident in the indomitable dollar, the US saw sanctions as a free way to fight Russia without risking troops. But you are paying the price in lost monetary loyalties. Nations signing deals to trade without the dollar now include longtime US allies such as the Philippines and Thailand.
The number of countries with central banks looking for ways to launch their own digital currency has tripled since 2020 to more than 110, representing 95 percent of global gross domestic product. Many are testing these digital currencies for use in bilateral trade, another open challenge for the dollar.
Although some doubt that a dominant dollar is important to the US economy, high demand for the currency generally tends to reduce the cost of borrowing abroad, a privilege the United States sorely needs today. Among the top 20 developed economies, it now has the second-highest current account and fiscal deficit after the UK and the second-highest external liability (as reflected in its net international investment position) after Portugal.
The risk for the United States is that it grows overconfident, fueled by the “there is no alternative” story. That narrative is based on global trust in American institutions and the rule of law, but this is exactly what the weaponization of the dollar has done so much to undermine. It also relies on confidence in the country’s ability to service its debts, but that, too, is fading as its dependence on foreign financing continues to grow. The last line of defense for the dollar is the state of China, which is the only economy large and centralized enough to challenge the supremacy of the US currency, but even more deeply in debt and institutionally dysfunctional.
When a giant comes to trust the weakness of its rivals, it is time to look in the mirror. As he faces challenges from a “barbaric relic” like gold and new contenders like digital currency, he must look for ways to bolster confidence in his finances, without taking his status as a financial superpower for granted.