Daily Management Review

Is There Anyone to Move Dollar Out of Its 'Number One' Place?


For the past 70 years, the dollar has had superpower in the financial and monetary system of the world. Despite numerous talks about the rise of the yuan and the euro, the superiority of the American currency is indisputable. Still, no currency in the world cannot be compared with the dollar as means of payment, a store of value or a reserve asset.

Is There Anyone to Move Dollar Out of Its 'Number One' Place?
At the same time, the dollar's dominance has quite fragile foundations, and the system, that supports it, is extremely unstable. But worst of all, the alternative reserve currencies are also far from perfect. This means that the transition to a more secure procedure would be lengthy and difficult.

For decades, the strength of the US economy justified the dominant position of the dollar. However, in recent years, the gap between America's economic weight and its financial resources has become quite apparent.

Today, the United States accounts for 23% of global GDP and 12% of international trade in goods. At the same time, about 60% of world industrial production and a similar share of the world's population are actually in the dollar zone, as the currencies of these countries are pegged to the dollar or in any way are coordinated with it.

The share of American companies in the total volume of international corporate investments fell from 39% in 1999 to 24% currently. However, the influence of Wall Street on the dynamics of world markets today is higher than ever before. US fund managers control 55% of global assets (ten years ago the figure was 44%).

The growing gap between the US economy and financial strength creates problems for other countries in the dollar zone and beyond. All of this is obliged to the fact that the cost of dollar dominance begins to outweigh the benefits, says the British magazine The Economist.

Firstly, economies have to withstand the sharp market conditions fluctuations. In recent months, the prospect of even small changes in interest rates in the US led to a significant outflow of capital from emerging markets, thus hurt the local currency and share prices. Decisions of the US Federal Reserve affect the offshore debts and deposits in dollars of total size of about $ 9 trillion.

Because some countries have binding national currencies to the dollar, their central banks should respond to the Fed's actions. Foreigners, own 20-50% of government bonds in local currency in countries such as Indonesia, Malaysia, Mexico, South Africa and Turkey, are likely to pull out of emerging markets, as the US rate rise.

The second problem is the absence of any delimiter for offshore dollar system in the event of a crisis. In 2008-2009, Fed's reluctantly went to the rescue: acting as a lender of last resort, it has provided $ 1 trillion of liquidity to foreign banks and central banks. Future crises will require a more significant amount.

The offshore dollar world today is almost two times bigger than in 2007. By 2020, it will be comparable in size to the American banking sector. At the same time, starting from 2008-2009, the US Congress has been expressing dissatisfaction with the practice of emergency lending from the Fed.

How long the country will be willing to put up with the dependence of their financial systems to the fragmented and dysfunctional political system of America?

This question leads to the third problem: America is increasingly using its financial power as a political tool. Politicians and US’ prosecutors are using dollar payment system as a way to establish control not only over the capricious bankers and unscrupulous football officials, but also on such recalcitrant regimes like Russia and Iran.

The Americans, of course, can say, "Why should we worry." They forced nobody to tie their national currencies to the dollar and did not encourage foreign companies to issue debt in dollars. But the dominant role of the dollar is reflected on the Americans, too: it brings great benefit both for the economy and the US Treasury.

Ideally, America should have shared this duty with other currencies. However, if the hegemony of the dollar is unstable, then any other potential receiver will be in an unstable position, too.

There is no clear leader among the candidates on the reserve status today. In spite of the economic strength of Europe and China, the current statuses of the euro and the yuan do not allow them to become the number one currency in the world.

All this means that in the near future, the global financial and monetary system will not be able to get rid of the dollar. The dollar is not a worthy opponent. Nevertheless, the system, which keeps it, continues cracking.

source: economist.com