Is the United States dollar about to lose its predominant reserve currency status in the world financial system? Cheerleaders of the greenback point out that the global share of the US dollar as a unit of account, means of payment and store of value hasn’t fallen much, despite all the political polemics about a terminal decline. The Chinese renminbi (yuan) cannot become a real global reserve currency unless capital controls
are phased out and the exchange rate is made more flexible. Given the authoritarian nature of the Chinese regime, especially under dictatorial Chinese President Xi Jinping, such market-oriented policies are highly unlikely. Therefore, you cannot replace something with nothing! The US dollar’s advocates dismiss the euro, yen, and yuan. Former US Treasury Secretary Lawrence Summers arrogantly dismisses the other three currencies and countries: “Europe is a museum, Japan is a nursing home and China is a jail.” “The dollar is America’s superpower. It gives Washington unrivalled economic and political muscle. The US can slap sanctions on countries unilaterally, freezing them out of large parts of the world economy,” argues Fareed Zakaria.
The political challenge to America’s superpower status by rivals such as China, Russia and others assumes the form of a new economic challenge. The greenback has enjoyed a dominant role since the design of the Bretton Woods system after World War II. But the economic disruptions experienced by Iran and Russia after the US-led NATO powers evicted them from dollar-based trading systems like SWIFT, have led many powerful countries to consider dumping the dollar and looking for alternatives. Washington’s weaponising of the dollar has led powerful emerging economies, rivals such as China, Russia and Brazil and allies such as India, Saudi Arabia and the European Union, to search for ways to ensure that they do not become the next Iran or Russia. India, a US ally, is settling most of its oil purchases from Russia in rupee-rouble terms. Digital currencies (alternatives to cryptocurrencies) might be another alternative to the US dollar.
“In a world that is divided into two geopolitical spheres of influence — namely, those surrounding the US and China — likely, a bipolar, rather than a multipolar, currency regime will eventually replace the unipolar one,” concludes economist Nouriel Roubini. A more formidable challenge to the dollar comes with a new coalition of emerging economies led by BRICS. During the 15th edition of the BRICS summit in Durban, South Africa, scheduled in August, the main agenda seems to be an alternative new global reserve currency, a clear signal of the impending attempts at de-dollarisation. Joseph W. Sullivan, a former member of the White House Council of Economic Advisers, argues: “BRIC is to be used for cross-border trade by the BRICS nations.” Sullivan argues that a BRICS-issued currency would be like a new union of up-and-coming discontents, which on the scale of GDP now collectively outweighs not only the US, but the entire G7 weight put together.
“Is the dollar’s world dominance at risk? Probably not. And the truth is, it doesn’t matter,” writes Nobel laureate Paul Krugman. I beg to disagree: politics determines economics, not the other way round. The truth is simple: as the US superpower status wanes, the emerging economies rise, particularly BRICS, and the dollar’s status as a global reserve currency is likely to face a serious challenge. The war on the dollar will, however, be a long one.
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