https://www.scmp.com/comment/opinion/article/3174690/end-us-dollar-we-know-it
The end of the US dollar as we know it?
- As ordinary Russians feel the heat from the still mighty dollar turned hostile, pundits cannot agree on the future of the greenback
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Will the US dollar lose its dominant status in global finance? This question has been asked for decades, probably as early as when the old Bretton Woods system of fixed exchange rates was thrown off the gold standard at US$35 for an ounce of gold by the Richard Nixon White House in the early 1970s. But the question had concerned mainly economists and politicians, while being literally academic for most people.
Now, though, it is on many people’s minds, thanks to the Russian-Ukrainian war and Washington’s financial warfare. Many ordinary Russians suddenly find they can’t access Visa, Mastercard, American Express, Apple Pay and Google Pay. Foreign goods and services have become limited, prohibitively expensive or completely unavailable. The banks they use can’t help them make overseas business transactions or money transfers, because they have been cut off from Swift, the global messaging system for international payments.
While this has been a demonstration of America’s financial prowess and that of its Western allies, many pundits consider weaponising the global financial system and the US dollar amounts to abuse and will lead more countries, including friendly ones, to seek alternative systems.
Will this eventually lead to the end of the US dollar’s dominance? Experts have answered yes, no, and maybe. Rather than seeking a definitive answer, which is simply unavailable, it’s worth considering the different schools of thought.
The dollar dominance will erode
Former chief of the Hong Kong Monetary Authority (HKMA) Joseph Yam Chi-kwong has been the rudest critic. The US government had “weaponised” the financial markets, a “stupid and crazy” strategy that would undermine the US dollar’s status as the world’s reserve currency, he said in a webinar run by the research unit of the HKMA.
“First of all they put restrictions on Chinese enterprises’ financing in the US, and stopped Americans investing in Chinese enterprises at the same time. These are like capital controls or restrictions on people to use the US dollar or the international financial infrastructure. I think the Americans are getting crazier in this regard.”
Commenting on sanctions against Russia, he said: “Some countries, like Russia, are not allowed to use the international financial infrastructure due to some of the crazy US tactics in the short run. The affected countries will come across troubles and inconvenience.
“However, if you look at the long term, I think there will be some major negative risk for the US dollar as an international reserve currency.”
In recent years, like clockwork, Goldman Sachs has been warning that the dollar is at risk of losing its global status as the main reserve currency. Since the war started in Ukraine, the Wall Street investment bank has doubled down.
In a research note issued late last month, the bank argues that America’s tough sanctions on Russia, especially the targeting of the Russian central bank, have raised concerns among many countries, even friendly ones, which will move away from US dollar-denominated assets. This reluctance is further exacerbated by rising US sovereign debts, making such assets even less attractive.
“If a reserve currency issuers’ debt is allowed to grow relative to GDP, eventually foreigners may grow reluctant to hold more of it,” the note said.
Gita Gopinath, the International Monetary Fund’s first deputy managing director, said the sweeping measures imposed by the Western alliance against Russia’s invasion could encourage the formation of small currency blocs between countries that are trading partners.
“The dollar would remain the major global currency even in that landscape but fragmentation at a smaller level is certainly quite possible,” she told the Financial Times. “We are already seeing that with some countries renegotiating the currency in which they get paid for trade.”
Last month, the fintech research group of the Arab Monetary Fund, which represents Arab central banks, proposed alternative payment systems to bypass Swift. Saudi Arabia, the United Arab Emirates, Russia, China, India and Iran are among countries that have already started trading or planning to trade in the currencies of partner countries.
No worries for US dollar
There is a simple argument that US monetary dominance won’t end any time soon: there is no alternative currency to take its place. That has been the argument of prominent US economists Paul Krugman and Eswar Prasad, among many.
“People have been asking that question for my entire professional career. Seriously: I published my first paper on the subject in 1980,” Krugman wrote in The New York Times.
“A lot has changed in the world since I wrote that paper, notably the creation of the euro and the rise of China. Yet the answer remains the same: probably not. For different reasons – political fragmentation in Europe, autocratic caprice in China – neither the euro nor the yuan is a plausible alternative to the dollar.”
But why not?
Krugman said the euro could have been an alternative because the European Union’s economy is huge, as are its financial markets. But since the sovereign debt crisis more than a decade ago, Europe’s once comparably large bond market has effectively been fragmented back into individual countries’ bond markets.
Though the crisis started in the US, it retains the advantage of a single bond market with the range, depth and liquidity that no other bond market can rival.
And the yuan is not even close.
Like its economy, Prasad observes, the rise of the yuan on the international stage had been dramatic, including its official inclusion in the IMF’s SDR (special drawing rights) basket of currencies in 2016. But then, it stalled. “Starting in the mid-2014, the Chinese economy seemed to be losing steam, domestic and foreign investors became less confident in the stability of China’s financial markets,” he wrote in his new book, The Future of Money: How the Digital Revolution is Transforming Currencies and Finance.
“The reimposition of capital controls, persistent depreciation pressure on the currency, and the lack of financial market and other reforms seem to have taken the shine off the renminbi’s rise.”
According to IMF data, the US dollar’s share of international reserves dropped from 70 per cent to 60 per cent in the past two decades. Up to a quarter of the decline in the greenback’s share can be accounted for by greater use of the yuan. Even so, the Chinese currency still only accounts for less than 3 per cent of global central bank reserves.
A new study by the Carnegie Endowment for International Peace argues that giving up the US dollar for global trade and reserve accumulation would be very difficult for America’s adversaries and would require major economic adjustments, perhaps nothing less than changing the patterns of global trade.
The study raises three key points. “First, it would be extremely difficult, if not impossible, for countries like China and Russia to upend the dominance of the US dollar,” wrote its author, Michael Pettis, a professor of finance at Peking University’s Guanghua School of Management.
“Most sophisticated economic policy advisers in China and Russia know this, even if they have to express this knowledge cautiously.
“Second, for the US dollar to stop being the world’s dominant currency would mostly require specific action by US policymakers to limit the ability of foreigners to use US financial markets as the absorber of last resort of global savings imbalances.
“And third, a global economy without the US dollar – or some unlikely alternative – as the currency lingua franca also … would likely be politically disruptive for many countries. This is especially the case for countries whose economies have grown around persistent trade surpluses.”
So, who’s right?
It’s really a matter of time frames. In the near term, no single currency has any hope of replacing the still mighty dollar. But notice that people have long stopped referring to it as the “almighty dollar” because it was once really as good as, or even better than gold, under the old fixed exchange rates system.
But as the US increasingly turns to international finance as a tool of foreign policy, sometimes in place of military deployment, more and more countries have a greater incentive to find financial alternatives.
When Queen Victoria celebrated her Diamond Jubilee in 1897, the British Empire was at its zenith. Half a century later, the empire was no more than a name and the British pound had been replaced by the US dollar as the “currency lingua franca”.
As the world moves from a unipolar to a multipolar international system, globalised trade will likewise fragment into more trade blocs, some of them hostile to each other. The US is unlikely to retain its geopolitical and economic dominance as the century progresses.
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