At the recent Jackson Hole economic symposium, the Bank of England's governor Mark Carney voiced his challenges with the U.S. dollar’s dominance. He believes that the world's system of relying on the dollar is unsustainable and that the “multi-polar global economy requires a new IMFS (international monetary and financial system)”.
On shaky footing
The annual meeting of the global central banks is known to be the barometer of the policy turning point. As the oldest central bank in the world, the Bank of England’s statement on the U.S. dollar from the perspective of central bank governance is not only a theoretical discussion on the financial regulation and monetary policy, but an actual indication that the position of the U.S. dollar system in international trade and finance appears to have been shaken. This is undoubtedly an important signal affecting international trade, finance, and economic structure. Decision-making departments, investors and business practitioners, therefore, should pay heed to this signal.
History of the US dollar
The decline in the status of the dollar has been a process pushed by historical development. Since the Second World War, the Bretton Woods system defined the dollar as the dominant currency. This international monetary system has always followed the changes in the global economic order, state governance, and geopolitics. The development of international trade and the deepening of economic globalization inevitably required the continuous expansion of the international monetary and credit systems.
The US dollar as the representative of modern currency
After the collapse of the Bretton Woods system, and despite the gold standard system being disintegrated, the U.S. dollar remained the leader among all international currencies, and the international monetary system continues today to rely on the U.S. dollar. With the dollar decoupling from gold, it effectively became a representative of modern credit currency. With that, the innovation and development of the international financial system led by the dollar has now profoundly affected and shaped the world.
With the rise of emerging market countries, the US has gradually reduced its position in international trade and the economy. It appears that with this the U.S. dollar will inevitably decline. However, the U.S. only accounts for 10% of global trade and 15% of global GDP, but the U.S. dollar still accounts for half of global trade settlement and two-thirds of global securities issuance. He said that the dominance of the dollar in the global financial system has increased the risk of liquidity traps, leaving many countries facing the devastating spillover effects of U.S. economic fluctuations. The large-scale quantitative easing after 2008 also made the inherent vulnerabilities and implicit systemic risks of the U.S. dollar-dominated international monetary system are gradually becoming clearer.
Andrew Sheng, the former Chairman of the Hong Kong Securities and Futures Commission, recently wrote that the "politicization" of the US dollar has also made the world's countries aware of the urgency of de-dollarization. The "politicization" of the U.S. dollar is manifested in two ways. Firstly, the U.S. government uses the U.S. dollar to impose unilateral sanctions and long-armed jurisdiction over some countries in the international trade and financial settlement system, coercing them to succumb to the political needs of the U.S. government. Secondly, the U.S. uses the allegations of the “currency manipulators” to make it's trading partners swallow and accept the U.S.’s trade policies and demands. Most crucially, the U.S. President Donald Trump continues to pressure the Federal Reserve, making it increasingly “Trumpized” and losing its independence. This does not guarantee the stability of a currency needed for international trade and financial transactions, and the economic interests of other countries. The “excessive privileges” of the dollar are increasingly incompatible with the current needs of international trade and financial transactions. For this, the world has a real need and reason to get rid of the dollar.
Judging from the current situation, the U.S. dollar is facing challenges on many fronts. One is the establishment and development of the currency settlement systems represented by the Eurozone Instex, RMB CIPS, and the Russian SPFS in an attempt to abandon the SWIFT payment system dominated by the U.S. dollar, in moves to weaken the "privileges" of the dollar. In addition to this, many central banks are buying gold to maintain the stability of their respective currencies. According to statistics, central banks around the world have purchased 651 tons of gold in 2018, an increase of 74% year-on-year. Some analysts have pointed out that the central banks’ concern for gold reflects the problem in their trust of the U.S. dollar. Going further still, the emergence of digital currencies like the credit offerings of multinational corporations may replace the role of the U.S. dollar in the international trade and financial system.
Continuation of "dollar privilege"
Although the current international situation has eroded the status of the U.S. dollar day by day, for the U.S. dollar to be replaced is still a long-term process. The dollar’s strength is based on the hegemonic position of the United States in the world after the Second World War. The overall strength of the United States remains unparalleled, and it will inevitably adopt various methods to prevent the loss of its "dollar privilege." As Benn Steil, director of international economics at the Council on Foreign Relations pointed out, “faith in U.S. institutions, a (relatively) independent Federal Reserve and sheer inertia make the dollar very hard to dethrone.”
Decline of the dollar will be a long process
With the rise of trade protectionism and counter-globalization, the status of the dollar is facing increasingly more challenges. Some believe that in the long run, the IMF should change the situation by establishing a multipolarity. In this regard, ANBOUND, an independent think tank based in Beijing, has analyzed the development trend of the international monetary system through the study of the gold standard and super-sovereign currencies. Unlike other forms of “international currency” that are discussed by central banks as alternatives to the U.S. dollar, ANBOUND believes that the “super-sovereign currency” will prevail, or in other words, that the U.S. dollar will be replaced by a geo-currency in the development of the future international monetary system, not by digital currency.
The status of the dollar might be in a slow decline, but its decline will be a very long process. In the short term, the world may not ever be able to move on from the dollar system.