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Gripes about the greenback are nothing new. A French finance minister sniped at the “exorbitant privilege” its hegemony conferred on the US nearly six decades ago. Geopolitical shifts present an opportunity to challenge the dollar’s dominance. Witness the Brics development bank’s drive to lend in local currencies. Its goal is to offer an alternative to the US-based financial order.
Discontent is understandable. Sanctions on Russia highlighted the risks of holding foreign reserves in dollar-denominated assets. Currency fluctuations, notably the dollar’s recent rise to a 20-year high, can cause real damage. A 10 per cent rise in the dollar cuts emerging economies’ output by 1.9 per cent after a year, says the IMF.
Principal reserve currencies have suffered before, for example the British pound’s decline after the first world war. A shift away from the dollar could weaken the currency, raise US interest rates and reduce demand for US Treasury securities. Some $7.4tn, or 31 per cent, of Treasuries were owned by foreign investors at the end of last year. The market’s insouciance about the US debt burden would quickly turn.
Yet an overthrow of the dollar is unlikely. It owes its dominance to network effects, the depth of US capital markets and the rule of law. It has a hefty 58 per cent share of global official foreign reserves, despite a drop of 13 percentage points since 2000. It dominates international banking and global trade.
Russia has pivoted to the renminbi, which now accounts for 16 per cent of its export payments. But other Brics countries, particularly India, are wary of Beijing’s potential dominance. That plus currency controls makes them nervous. Their mooted development of a common currency is a non-starter.
Nonetheless, the US should not be complacent about the greenback’s primacy. Sanctions that weaponise the dollar should be used sparingly, with global financial stability kept in mind. The dollar’s dominance carries responsibility as well as privilege.
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