https://www.project-syndicate.org/bigpicture/is-the-us-dollar-s-global-hegemony-at-risk
Is the US Dollar’s Global Hegemony at Risk?
May 5, 2022
The Big Question is a new feature in which Project
Syndicate commentators provide compelling answers to a timely
question.
With Russia’s invasion of Ukraine and the
resulting Western sanctions likely to fragment the global economy further, some
think the US dollar’s long reign as the world’s favored reserve currency may be
coming to an end. But, with no plausible alternatives to the greenback on the
horizon, how realistic is such a scenario?
In this Big Question, we ask Barry Eichengreen, Şebnem Kalemli-Özcan, Paola Subacchi, and Yu Yongding to address the latest doubts
about the dollar’s global supremacy.
Featured in this Big Question
BARRY EICHENGREEN
Normally, changes in the international monetary
and financial system occur gradually, even glacially. This is an apt
characterization of the system’s evolution over the past 20 years. Since the
turn of the century, the dollar’s share in identified global foreign-exchange
reserves has fallen by about half a percentage point a year, as central banks
have added Canadian dollars, Australian dollars, Swedish krone, and other
nontraditional reserve currencies to their portfolios. The result is a less
dollar-centric international monetary and financial system that better
resembles a less US-centric global economy.
But might an ice floe break free of the
glacier? Might there be a sharp shift from the dollar to, say, the Chinese
renminbi? We have seen such a shift once before in modern history, from
sterling to the US dollar at the time of World War I.
Two factors occasioned that shift. First, a
geopolitical disturbance disrupted business in the incumbent currency, as
wartime exigencies forced the British government to resort to capital and
exchange controls. Second, an alternative to sterling appeared once the Federal
Reserve Act created a US central bank to provide liquidity to dollar markets.
Today, another geopolitical disturbance,
Russia’s attack on Ukraine, has prompted the United States to freeze much of
the Russian central bank’s reserves, encouraging other central banks to
contemplate shifting away from the dollar. For the moment, however, the other
precondition for such a shift, namely the existence of an alternative, is not
in place.
Countries cannot migrate to the euro or the
yen, because Europe and Japan have cooperated with the US in applying
sanctions. Renminbi markets are still limited in terms of liquidity and
accessibility. And given Russian President Vladimir Putin’s example, reserve
managers will in any case hesitate to park their assets on the turf of an
authoritarian strongman.
Given this, I expect any erosion of the
dollar’s global hegemony to be gradual, not abrupt.
ŞEBNEM KALEMLI-ÖZCAN
The economic sanctions imposed by Western
countries on Russia following its invasion of Ukraine include weaponization of
the US dollar, seemingly calling into question the greenback’s global hegemony.
But, in the absence of viable alternatives, the dollar is unlikely to be
dethroned any time soon.
An alternative hegemonic currency should have
as large a role in world trade and finance as the dollar currently does. The
euro and the renminbi are important trading currencies, but they have a smaller
footprint in global finance. The strong
spillovers to
emerging markets from US monetary policy – but not from monetary policies in
other advanced economies – are a clear indication of the role played by the
dollar in global capital flows.
The alternative should also be a safe asset, so
that central banks are willing to hold their reserves in bonds denominated in
that currency. Currently, central banks hold most of their reserves in dollars, followed by the euro. Can the euro
topple the dollar to become the next reserve currency? I doubt it. Even though
the euro is a safe asset, the absence of a Europe-wide government limits the
issuance of euro-denominated government bonds, relative to US treasuries.
The renminbi is not a contender for this role
either, as it is neither fully convertible nor backed by democratic
institutions and the rule of law. Chinese capital controls currently make it
practically impossible for the renminbi to play a larger role in global capital
flows and serve as a reserve currency.
Yet, having watched Russia’s central bank being
cut off from its dollar reserves, many countries now have a strong desire to diminish the dollar’s
outsize role. In principle, any currency can be used as a weapon. And the most
damaging weapons of all would be those of autocratic governments.
PAOLA SUBACCHI
Like Mark Twain’s supposed demise, the death of
the dollar has been greatly exaggerated, for the following reasons.
First, the dollar remains the most-used
currency in international trade, accounting for about 80% of export
invoicing, and in
international banking, with approximately 60% of
international and foreign-currency liabilities and claims denominated in dollars. Three-fifths
of global foreign-exchange reserves are held in dollars, as is 64% of
foreign-currency debt.
Second, there is no significant alternative to
the dollar. The euro is the world’s second-most exchanged and liquid currency,
but its domain is largely regional – 66% of trade invoicing in Europe is in
euros. And just 21% of global foreign-exchange reserves are in euros. The other
international currencies that determine the value of the International Monetary
Fund’s special drawing rights – the yen, the British pound, and the renminbi –
are marginal holdings in official foreign reserves, with the renminbi
accounting for 2.4%.
Third, although China has the world’s
second-largest economy and extensive international trade links, the renminbi
remains a limited international currency. The policy-led program to internationalize
the renminbi has resulted in the currency being used in 30% of China’s trade.
But capital controls, though less stringent than in the past, constrain the
renminbi’s liquidity and international circulation.
Finally, China continues to depend on the dollar
system. It has the largest dollar holdings of any country outside the US,
including more than $3 trillion just in its foreign-exchange reserves.
Bilateral loans where China has a significant footprint are mostly denominated
in dollars, as is the capital of the multilateral Asian Infrastructure
Investment Bank and New Development Bank.
But, while the dollar is far from being
replaced or even downgraded internationally, this does not make the current
international monetary system more stable. China’s dollar dependence is a
conundrum that is now inherent to the dollar system and an intrinsic element of
instability. As the world economy has become more fragmented, the risk of
holding a global public good that is also the US currency is more tangible than
ever.
YU YONGDING
Hegemony is a geopolitical concept and, in my
view, should not be used to characterize the status of the US dollar. After the
gold standard was abandoned owing to the so-called Triffin
dilemma, the
dollar’s position as the dominant international currency strengthened rather
than weakened in the post-Bretton Woods system.
The fundamental reason was that trust in the dollar’s
integrity had not been fundamentally shaken. The rest of the world needed the
dollar, despite the fact that it was no longer convertible to gold, because the
currency was the stable standard for denominating values of goods and services,
an easily available means of exchange, and a safe store of value.
The basic contradiction in using the dollar – a
national fiat money – as a reserve currency is that the US must run
current-account deficits to provide dollars to the rest of the world. This
implies that the more the dollar is provided, the weaker it will be as a means
of international payment and a reserve currency. Essentially, this is still a
Triffin problem.
For now, the accumulation of foreign-exchange
reserves by developing countries, especially China, keeps the dollar
undeservedly strong. But the pattern may change. The current weaponization of
the dollar certainly will speed up the greenback’s decline as the dominant
international reserve currency. However, the network effect means that the dethroning
of the dollar is a long-term process. Nobody knows when the final reckoning
will come.
Featured in this Big Question
Writing for PS since 2003
167 Commentaries
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Barry Eichengreen, Professor of Economics at
the University of California, Berkeley, is a former senior policy adviser at
the International Monetary Fund. He is the author of many books,
including In Defense of Public Debt (Oxford University Press,
2021).
Writing for PS since 2013
5 Commentaries
Şebnem Kalemli-Özcan, a former senior policy
adviser at the International Monetary Fund, is Professor of Economics at the
University of Maryland, College Park.
Writing for PS since 2012
43 Commentaries
Paola Subacchi, Professor of International
Economics at the University of London’s Queen Mary Global Policy Institute, is
the author, most recently, of The
Cost of Free Money (Yale
University Press, 2020).
Writing for PS since 2010
66 Commentaries
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Yu Yongding, a former president of the China
Society of World Economics and director of the Institute of World Economics and
Politics at the Chinese Academy of Social Sciences, served on the Monetary
Policy Committee of the People’s Bank of China from 2004 to 2006.
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