The trade war is not the sole cause of the world’s troubles today. Trade is just one of several economic issues in the ongoing confrontation between the established and emerging powers. Increasing restrictions on investment flows is another manifestation of this struggle. Nor can we ignore the barriers against the movement of people – whether workers or students – or against technological cooperation. The barriers are growing in number and scope, and often they target specific nationalities.
Meanwhile, we are once again hearing old predictions that the dollar’s “exorbitant privilege” – a term coined by former French president Valéry Giscard d’Estaing, during his tenure as the country’s finance minister in the 1960s – is on the verge of its long-awaited end. Such claims first gained traction in 1971 when US president Richard Nixon declared that the dollar would no longer be convertible to gold, a move that effectively abolished the Bretton Woods system that had established the dollar as the world’s reserve currency.
Under that system, introduced in 1944, other currencies were pegged to the dollar at fixed exchange rates, and the dollar itself was convertible to gold at $35 per ounce. Debates have raged ever since over the fairness and efficiency of exchange-rate regimes and whether a viable alternative might inherit the dollar’s crown as the world’s dominant reserve currency.
International and national currencies are still valued relative to the dollar today, and their exchange rates are linked to it in varying degrees. Countries that adopt fixed exchange rates typically peg them to the dollar. Flexible exchange-rate regimes are also based around the dollar. Even if other currencies are added to a basket of reference currencies, the dollar still carries the heaviest weight. In transactions not directly conducted in dollars, increasingly the case as governments turn to other local and international currencies, the dollar still serves as a reference currency for measuring the value of the others.
However, as the Harvard University economist Kenneth Rogoff makes clear in his recent book Our Dollar, Your Problem, no international currency is endowed with immortality. In his analysis of seven turbulent decades of international finance, Rogoff, who served as chief economist at the International Monetary Fund (IMF), shows how the traits that justify a currency’s status as a reserve currency, let alone a dominant reserve currency, are subject to constant scrutiny. Once a currency starts to fail the tests, no amount of diplomatic niceties or veiled or unveiled threats will prevent the search for alternatives.
The world today is closely monitoring the state of the dollar, the fluctuations in its value, and its stability and resilience in the face of US inflation and soaring debt. It is also keeping an eye on the credibility of the dollar, as measured by adherence to the rule of law, meeting financial commitments, and the sustained depth and liquidity of US markets, which offer a wide range of financial instruments that have normally been seen as a safe haven.
Unfortunately, the US’ rampant debt, rising interest rates and borrowing costs, and the constraints on the Federal Reserve’s ability to rein in inflation amid geopolitical conflict and economic warfare present a problem that touches every corner of the world.
As we know from global crises in the past, the harms are not just visited on those who caused them. This is why I have repeatedly warned in previous articles of the dangers of entrusting crucial economic and political decisions to impetuous and ignorant fools.
Rogoff reminds us of how John Connally, the US secretary of the Treasury under Nixon, famously dismissed the concerns and frustrations of those affected by Washington’s unilateral economic policies. “It’s our dollar, but your problem,” he said.
Little has changed since then. Policies are still shaped solely by the US’ narrow interests, as well as by a general indifference to the unintended consequences for trading partners or to the harms intended for targeted rivals. And it is ordinary people who end up suffering the most. It makes little difference who is at the helm. Whether he wears the hat of a cooperative friend or a madcap cowboy, the rest of the world will still be left to deal with the fallout from his decisions, surviving or failing depending on their economic strength and resilience.
Did not the inflation that hit the US in the 1970s send powerful tremors across the global economy? Did not the spikes in interest rates and financing costs trigger a tsunami of debt crises? Did not the US quickly recover while many developing nations were left in economic turmoil and forced to grapple with the rising costs of their dollar-denominated debts?
The same was true in 2008. It was the subprime mortgage crisis in the US that sparked the devastating global financial crisis. Again, the US was the first to recover, while Europe remained mired in financial and then economic troubles, with social and political repercussions that continue to be felt today. Emerging markets and developing countries were also hard hit due to sharp declines in trade, investment, growth rates, and jobs.
In today’s rapidly changing world, there is much to disturb the sleep of those who continue to envision the dollar’s permanent hegemony even as its foundations crumble. The true threat to the dollar’s supremacy comes from within. Among the most important factors are the burgeoning US federal budget deficit, runaway debt, and the accompanying inflation that is pushing interest rates higher.
As a result, the US economy has become vulnerable to sharp financial fluctuations, the effects of which are rippling across the world, heightening the probabilities of financial crises driven by international debt. If the Federal Reserve’s independence and its ability to maintain monetary stability and financial integrity are undermined, the situation could become perilous.
To those who think that he is exaggerating the risks of financial recklessness, Rogoff cautions that if there is one thing to learn from “examining the evolution of the global currency system over the past seven decades, it should be that surprising changes can and do happen.”
This article appeared in Arabic in last week’s edition of Ashaq Al-Awsat.
* A version of this article appears in print in the 19 June, 2025 edition of Al-Ahram Weekly
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