Every global economic crisis prompts legitimate concerns regarding the future of the dollar as an international currency, one that is used to settle cross-border transactions (and sometimes domestic ones as well outside the US), to price goods and services, and to preserve value and savings over time.
The dollar first emerged as a distant competitor to the British pound nearly a century ago. It was backed by the strength of a rapidly growing US economy, while sterling was weakened by World War I and further harmed by the debts and expenditures of the second.
Despite the economic toll of two world wars, the pound sterling at first retained its position among global currencies, largely due to long ingrained habits and a failure to appreciate the extent of Great Britain’s decline.
Then came two turning points. The first was the Bretton Woods Agreement of July 1944, in which the pound was noticeable by its absence as a benchmark currency in the post-World War II financial order. The second came with the Tripartite Aggression against Egypt in 1956, or the Suez Crisis as it was called by others at the time.
At this time, the British pound was still the world’s dominant “hard currency,” making up 55 per cent of global reserves. But when the US compelled the UK, France, and Israel to halt their assault on Egypt, the world understood that the so-called “free world,” as the West was known at the time, now had a new leader.
Henceforth, the currency of that leader would enjoy what Valéry Giscard d’Estaing, the French Finance Minister in the 1960s, called an “exorbitant privilege.”
This privilege afforded Washington unique advantages. It could borrow inexpensively, repay debts in its own currency (which it controlled through its mint), and enjoy monetary stability despite running high trade deficits. Through its control of this hard currency, which still accounts for 60 per cent of global reserves, the United States could wield enormous financial influence, bolstering its global dominance as the world’s largest economy, strongest military, and most advanced technological power.
Yet, despite the foregoing, we are now suddenly faced with a US president who, soon after coming to power in a landslide electoral victory, has proclaimed that his country has long been “looted, pillaged, raped and plundered by nations near and far, both friend and foe alike.”
What are we to make of this? Evidently the leader of the wealthiest nation on Earth has taken these words right out of the mouths of the leaders of far poorer nations whose participation in a grossly inequitable global order has left their countries crippled by extreme poverty, widespread malnutrition and disease, and deprivation from the benefits of progress.
Evidently, all those international looters, plunderers, and pillagers were far less effective and didn’t do a good job in the US, compared to their ravaging of Africa and elsewhere in the Global South.
As the Nobel Laureate in Economics Michael Spence explained in his recent article “Navigating the Trump Storm” – is determined to restructure international trade and investment to benefit US workers. But a major obstacle stands in the way: the ongoing demand for US financial assets, such as stocks, bonds, and the dollar itself as the world’s leading reserve currency.
In order to truly achieve the goal of reversing trade imbalances, Washington would have to deliberately reduce the attractiveness of its dollar-denominated financial assets by restricting capital flows in its balance of payments. Otherwise, nothing will fundamentally change.
To put it more simply, the US is implicitly bound to honour the commitments that come with the privileges of issuing the world’s premier reserve currency. Countries export their goods to the US, and the US exports whatever manufactures and agricultural products it can, with these exchanges being reflected in the balance of trade.
In like manner, the US imports and exports services (tourism, transport, logistics and so on) and these exchanges are reflected in the current account. Even when both accounts are in the red, its deficit is offset by capital inflows in various forms of investment and external borrowing. But with the total US public debt, both domestic and foreign, now standing at $36 trillion, something has to give.
Resolving this massive imbalance will require sacrifices in the capital account and the serious management of existing and future debt burdens.
US President Donald Trump is essentially following through on the process that began with the weaponisation of the dollar, using it as an instrument of sanctions and freezing assets or cutting off countries from the SWIFT international payments system. This process has led through the imposition of tariffs, the creative reinterpretations of “reciprocity,” the disruption of development aid, and the replacement of the multilateral rules-based international order with the “might makes the rules-based order” to the collapse of the so-called global order or at least its economic arrangements.
The global economic order has been in decline since the 2008 world financial crisis, which ushered in a period marked by the squeezing of Europe’s middle classes and their anxieties over losing the benefits of the welfare state. In the US, the middle classes have also been hit hard. The American dream of prosperity has faded, economic disparities have worsened, and social polarisation has intensified.
The challenges of declining competitiveness and technological advances, especially artificial intelligence, are likely to cause the middle classes and others further pain. But channelling their anger against more efficient international trade partners or harder-working migrant workers will neither reduce the pain nor resolve the problems.
Trump’s recent measures, even if aimed at trade and investment, have effectively destroyed the remnants of the post-World War II global economic order. The importance of the dollar will persist, but only until a viable alternative (or alternatives) emerges. Its survival is due not to its absolute strength, but rather to the relative weakness of its competitors.
The fate of the British pound after World War II offers the dollar a sobering lesson.
This article also appears in Arabic in Wednesday’s edition of Asharq Al-Awsat.
* A version of this article appears in print in the 17 April, 2025 edition of Al-Ahram Weekly
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