The dollar is king. This year the strength of the US currency has humbled the yen, the euro and the pound sterling. US interest rates are putting pressure on dollar debtors around the world.
This is not a surprise. It is often said that the dollar wins whatever the state of the world economy. It is a safe haven in crisis; in a boom, money surges into the dollar because US business is the prime generator of profits. But what is increasingly hard to ignore is how the dollar’s monetary pre-eminence is out of proportion to America’s actual economic standing in the world.
Thanks to the explosive growth of emerging markets such as China and India, the world economy is increasingly multipolar. As a result, the US accounts for little more than 20 per cent of global GDP and yet its share of currency reserves is closer to 60 per cent and the dollar is involved in 85 per cent of all foreign currency transactions. If currency is conventionally thought of as an attribute of sovereignty, then this preponderance of the dollar would seem to confirm the continued existence of a US financial empire. And yet in 2022 this is at odds with America’s polarised and dysfunctional politics and the great power competition it faces abroad. It seems almost anachronistic that the Federal Reserve still functions as the de facto central bank of the world, like a hangover from the era of the Marshall Plan in the mid-20th century, or the moment of unipolarity in the 1990s.
How long can this anomaly continue? Are there alternatives to the dollar? In times of war the question becomes an urgent one.
Read the full article at The New Statesman