The sudden surge in interest in what has been a perennial topic,the erosion of the dollar’s status as the world’s reserve currency and the global hegemony that confers,and China’s central role in most of the de-dollarisation that is occurring,has led some to believe that the end of the dollar’s post-war dominance is within sight.
While it is likely that,as has been the case since the turn of the century,the pervasiveness of the dollar in global trade and financial transactionswill continue to wane,it is improbable that the end of dollar dominance will occur any time soon.
China has struck a deal with Saudi Arabia to pay for oil purchases in yuan – the first time in nearly half a century that the Saudis have been prepared to accept anything but the US dollar in exchange for oil.Credit:AP
That dominance is built on a number of critical foundations that no other economy has. The US runs large trade deficits and therefore creates more dollars than its domestic economy requires,it has very deep and liquid markets to absorb the savings of those countries with big trade surpluses,the dollar floats freely with very limited capital controls and it has a legal system that the rest of the world generally trusts.
While Chinais seen as the major threat to the continued dominance of the dollar,it has none of those things and is most unlikely to change its economic model to run large trade deficits to absorb the rest of the world’s savings,or completely liberalise its financial markets,or abandon its managed exchange rate policy or its capital controls,or create a transparent and trusted judicial system.
That’s probably why,even though the dollar’s share of global foreign exchange has fallen from about 72 per cent at the turn of the century to about 59 per cent,China’s currency accounts for just under 3 per cent of those reserves.
Only about 2 per cent of global trade is conducted in yuan/renminbi against more than 40 per cent for the dollar. The dollar dominates global foreign exchange transactions with a share of almost 90 per cent and about two-thirds of all global securities issuance is in dollars.
The US dollar dominance is built on a number of critical foundations that no-other economy has.
The reality is that there is no conventional alternative to the dollar as the world’s reserve currency and,while China might have ambitions to chip away at that dominance,it is inconceivable that the Communist Party would surrender the tight control of its financial system,economy and even society that would be the price of a real tilt at grabbing that status.
Europe (about 20 per cent of foreign exchange reserves) might once have held ambitions for the euro but the disparate and at times dysfunctional nature of its individual economies and the nature of its trade policies – historically the European Union has run significant trade surpluses – has worked against it.
The trade issue is a fundamental one. While the dollar’s dominance benefits the US financial sector and enables the US government (and America more broadly) to borrow more cheaply than it might otherwise be able to do,it makes US non-financial businesses less competitive and has wiped out traditional jobs as they have shifted to developing economies such as China and India.
The reserve status is therefore both an “exorbitant privilege” and an increasingly exorbitant burden because running persistent large trade deficits – and America is probably the only economy and financial system that could absorb such a large share of the world’s trade surpluses – means increasing trade and fiscal deficits and debt and the winnowing out of much of the country’s less sophisticated elements of its industrial base.
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It is conceivable that,decades down the track,the world’s trade will have more of a multipolar appearance to it as various blocs develop trade in their own currencies. It is also conceivable that regional or international digital currencies,backed by gold and other assets with low volatility,might emerge.
It is difficult,however,to see anything emerging that ticks all the prerequisites required to either displace the dollar as the world’s reserve currency or be a genuine alternative. If it did,it would require a dramatic,traumatic and probably quite destructive reconstruction of the global economy and trade.