Is this the End for the US Dollar?

Professor Robert Wade writes that the weaponization of the dollar and the dollar payments system against countries such as Russia and Iran over the past decade has incentivised others to find ways to escape the dominance of the US dollar.

The US government’s overt “weaponization” of the dollar and the dollar payments system in the past few years, to sanction enemies like Iran, Cuba, Venezuela, Afghanistan, North Korea, and China has made them look for new ways to conduct trade. The US has used the dollar payments system to freeze Russia’ s access to $300 billion in liquid foreign exchange reserves. This is in the wake of Russia’ s invasion of Ukraine in February 2022. Some are urging the US government to go further and appropriate those reserves and give them to the government of Ukraine for post-war reconstruction.

Source: Wikipedia

Confidence is an indispensable requirement for a currency. Beyond a certain point of weaponization the US undermines international confidence in the dollar. The more talk there is of appropriating Russia’s reserves the more countries like China fear their reserves held in dollars or euros may no longer be safe.

So, BRICS (Brazil, Russia, India, China, and South Africa), led by Russia, are discussing how to escape dollar dominance. Even the European Union has recently shown signs of wanting to escape dollar dominance.

But people have been forecasting the end of dollar hegemony for half a century. This issue led economist Robert Triffin in 1960 to warn of an “imminent threat to the once-mighty US dollar” (his argument came to be known as “the Triffin Dilemma”). Economic historian Charles Kindleberger declared in 1976 that “the dollar is finished as international money”.

The dollar and dollar payment system remain overwhelmingly dominant. According to the Bank for International Settlements’ latest triennial survey, the dollar as of 2022 was part of 88 percent of all international transactions. That percentage is only slightly lower than in 1989, testimony to the dollar’s resilience. Meanwhile, the euro accounts for 31 percent of international transactions, the yen 17 percent, the pound 13 percent, the renminbi (RMB) only 7 percent, up from 4 percent in 2019.

As a share of global foreign exchange reserves, the dollar now accounts for around 60 percent, down from 72 percent in 2000. Over this period the RMB share grew from zero to 2.6 percent.

Dollar dominance allows the US to sustain large current account deficits – importing much more than it earns from exports, thereby “artificially” boost living standards for a large subset of Americans. Also, it lowers US corporations’ cost of foreign direct investment (FDI), fuelling their expansion around the world. And it allows the US to easily finance its military activities around the world.

Dollar hegemony will surely end – but not in the foreseeable future. Most of the world has no prospect of an alternative to the international dollar to be used at scale in the next two decades or so.

 

Reference:

Long Read: The beginning of the end for the US dollar’s global dominance, Professor Robert Wade, LSE Blog