To speculate about the possible demise of “King Dollar” seems to have an irresistible allure for financial pundits. Febrile opinions gyrate from “it’s coming with irreversible speed” to “this will never happen”. I have great difficulties sharing the excitement. “World currencies” come and go and the world doesn’t stop for that. Any currency promising to be a reliable medium of exchange, store of value and widely used unit of account can make it. It is the reach of a currency which makes it attractive. Be it the Spanish dollar, a 16th-century global currency and legal tender in the US until 1857, or Britain’s sterling. Even cowry shells had their day.
The US dollar, in existence only since 1913, “conquered” the world after WWII, with the United States powering ahead as the economic behemoth of the world. Most commodities were priced in dollars. This was most salient in energy markets, with the advent of the petrodollar and the Eurodollar – deposits of dollars accumulated outside the US in Europe and Asia. We grew into a world where the American currency was not ours, but our problem. The fluctuations of the dollar’s value in comparison with other currencies and its interest rate changes have consequences for every country, often more than for America.
Nobody forces us to hold dollars. We do so because a large chunk of trade is facilitated in USD and because dollars offer the deepest markets in debt, hence the ability to store vast amounts of foreign savings without too much trouble attached. US trade and budget deficits are the safe haven for our surplus savings. We rely on the US to honour their debt more than say, Tajikistan. It’s not that we wouldn’t look in horror at the regular “debt ceiling” standoffs in Congress. Yet, at the end of the day, we know they can print the dollars they owe. Largeness is a big attraction, yet not enough. China is by now the second-biggest economy on earth. Yet it is a closed country in most aspects. Capital controls and managed exchange rates make deposits an investment gamble, not a safe storage for excess savings. Investments and deposits are not guaranteed by unviable rules of law, but by the will of the CCP.
This does not mean that bilateral trade cannot be conducted in any other currency. Goods could be even bartered for that matter. When countries like Brazil decide to facilitate trade in Chinese yuan, or India agrees with Malaysia to exchange goods in rupees, as they did lately, they can do so. It will not replace the universal significance of the dollar, though.
You can’t take those rupees and pay for a delivery of Chinese components, or buy strawberries in Malta for it. These currencies lack universality and depth.
This is why the foreign currency markets are dominated by the dollar. If one wishes to exchange Mongolian tugrik for Laotian kip, the best-stocked money exchange would be challenged to come up with a satisfactory quote. There is simply not enough bilateral trade between Laos and Mongolia. What a money changer can find out though is a current dollar valuation for both. The tugrik will be converted into dollars and then, for those dollars, kip are bought. There’s nothing nefarious in this. It is the superior liquidity which gives dollars their 88 per cent dominance in foreign exchange. To read any US strong-arming into this is droll.
What has heated the discussion, fuelled hopes, or instilled fears over the years, is of course the US habit to “weaponise” the dollar for foreign poicy and strategic aims, and the territorial overreach by US courts and the States’ Internal Revenue Service. It is already grating for bankers to live in permanent fear of arrest and extradition if they had failed to notice that their customer was born in the US, despite her Maltese passport. But it is of another magnitude altogether if you are a government in disagreement with US foreign policy aims and must fear that your banks are cut off from all banking activity, with assets frozen, money transfers made impossible and receivables stranded.
The US dollar, in existence only since 1913, ‘conquered’ the world after WWII- Andreas Weitzer
You may end up in total destitution like North Korea or Iran. It is a risk any government has to face, not just brazen villains or crazed dictators. When President Donald Trump shredded the Iran Accord, the agreement to exchange sanctions relief for nuclear arms control and levied even more onerous sanctions on the Mullahs, the EU, like the United States signatory of the protocol, tried to salvage it.
To show that the EU was willing to stick to its side of the deal, it set up a body to resume trade with Iran. A clearing account was installed and a list of goods for export and import agreed with Iran. This included spares, capital goods, production investment, training and, most important, oil, because somehow Iran’s imports had to be paid for. The project faltered in its infancy. Banks and companies, all of them having unavoidable US footprints, were unwilling to commit. They were too afraid to anger the US, even when sticking to the letter of the sanction laws. Germany even introduced legislation to force companies to abide by the protocol. Nothing came out of it. A deal to barter artificial limbs for pistachios stalled.
This is why the foreign ministers of Brazil, Russia, India, China and South
Africa (the “BRICS”) met in June to discuss strategies to sanction-proof their countries. They were joined by Saudi Arabia, UAE, Egypt, Kazakhstan, and others. Most of these countries are not yet in the US crosshairs for primary or secondary sanctions. Despite the fact that most of them are refusing to ostracise Russia for its aggression and prefer to profit from subverting embargoes. Re-exports are a booming business, from Armenia to Kazakhstan, and cheap oil imports from Russia a boon for India and China. Their idea was to create a shared currency, to navigate unhindered in a dollar-free environment.
The Eurozone, a currency block of only loosely associated nations, showed how difficult and risk-fraught it is to share a single currency without fiscal unity. In 2011, in the aftermath of the GFC, it took the rule-bending, reckless initiative of the then president of the ECB Mario Draghi to save the currency zone from falling apart. But euro countries were far better interconnected and aligned than, for instance, Egypt and Brazil. And still, economic disparities threatened to pull the currency union apart. The aspirants of an anti-US currency block will have to choose if they are willing to fully submit to China’s rule, or rather stay at the sidelines as now, profiting from a loose
non-alignment. A “shared” currency would never work.
This does not mean that the US tendency to sanction ever more persons, countries and companies will not slowly over time erode the dollar’s predominance. As global trade will localise and decay into a host of limited, bilateral trade agreements, many transactions will by denominated in other currencies than the dollar. Official reserves will hold fewer dollars. Holdings will be dispersed over multiple currencies, as long as they can maintain value.
To accumulate reserves in Turkish lira, for instance, would not enhance the creditworthiness or wealth of a country. We see that gold is increasingly bought by cautioned central banks in their wish to diversify away from dollar politics. But, at the end of the day, they can’t stray far without risking stability, market trust and the ability to remain liquid in times of upheaval.