On war, debt, and hard currency — II

Mahmoud Mohieldin
Tuesday 14 Nov 2023

Calls to dethrone the dollar as the world’s main international currency are driven by a desire to limit its power in times of peace and prevent its weaponisation in times of war, writes Mahmoud Mohieldin



ill the dollar retain its hegemony in this turbulent and volatile world?

What determines this question varies from one person to the next, as it has since the dollar first claimed international dominance many years ago. The dollar is still the currency of choice for the world’s central banks. It accounts for 60 per cent of global reserves, down from 70 per cent in 2000, even as the US accounts for only 25 per cent of the global economy.

The dollar is also the currency used in over 40 per cent of international transactions, up from 35 per cent in 2012. It is the most important currency used in international loans, with its share rising from 45 per cent in 2007 to around 65 per cent in 2020.

For those interested in periodical updates on these figures, the sources are the Bank for International Settlements (BIS), the International Monetary Fund (IMF), and the SWIFT international payments system. Indian-American economist Eswar Prasad relies on these in his study of the dollar’s durability, notably in his important work The Future of Money, which discusses the impact of the digital revolution on currencies and finance.

The US’ allies have sometimes been harsher critics of the dollar’s dominance than its enemies. In the 1960s, the French objected to what they called the “exorbitant privilege” the US enjoys as the producer of the world’s dominant currency. Dollar transactions backed by the US financial sector come with attractive returns, and the more dollar holders there are, the more advantages accrue to the US Central Bank the Federal Reserve.

The US can settle its international obligations in its own currency. It can also impose sanctions on others by using its currency as a weapon, as it has done against Iran, Russia, and Afghanistan. By expanding the international use of its currency beyond the size of its domestic economy, US monetary and fiscal policies can affect global economic conditions.

Reducing the hegemony of the dollar was one of the motives behind the European drive to create a single currency. The Russians also want to rein it in, especially after it started being weaponised against them. The Chinese see the dollar’s continued hegemony as an affront to global economic multipolarity.

At the Summit for a New Global Financial Pact held in Paris in June, Brazilian President Luiz Inácio Lula da Silva stressed the need to rethink the overreliance on the dollar, and South African President Cyril Ramaphosa backed him up with a call to promote the use of local currencies in international trade.

China, a leader in international trade, has suggested the wider use of its currency, the renminbi, for international transactions. Russia has already switched to using the renminbi as its reserve currency and in its trade abroad after the West froze $300 billion of Russian assets because of the war in Ukraine.

Calls to dethrone the dollar are thus both new and old. They are driven by the desire to limit its power in times of peace and prevent its weaponisation in times of war.

Even so, the dollar’s primacy as a hard currency continues. Even if its share in total international reserves has declined, it still has three times the Euro’s share at 20 per cent of the total. It is also striking that the dollar’s share as a currency for international payments and loans has increased at a time when the US has taken measures that are almost guaranteed to shake confidence in the currency, especially given rising inflation rates and the unprecedented scale of the weaponisation of the dollar in international disputes.

Perhaps the main reason for the reluctance to replace the dollar with another currency for international transactions is one that Lula mentioned: whenever the subject of replacing the dollar with an alternative is raised, people get nervous, despite the adverse impacts the dollar has had on the trade of low- and middle-income countries.

A second consideration is the fact that the US economy performs better than its competitors. This is still the case today, despite the problems of the US economy, such as the increase in US debt to over $31 trillion by the beginning of this year, and the Federal Reserve’s failure to manage inflation earlier after the unprecedented monetary easing policies implemented during the Covid-19 pandemic.

US Treasury Secretary Janet Yellen has mentioned another reason why it is hard for other countries to come up with a suitable alternative to the dollar. In a press conference in Paris in June, she said that “there is a very good reason why the dollar is used widely in trade and that’s because we have deep, liquid, open capital markets, the rule of law, and extensive financial instruments.”

However, it is a universal law that the world changes when people start pushing each other to do so. It is also a fact that changes can now take place in a matter of months and days, whereas in the past this used to take many decades. One of the lessons of the pound sterling’s removal from the throne that the dollar now sits on is how war, debt, and the performance of the UK economy eroded sterling’s primacy as an international reserve currency, as was discussed in my last article in Al-Ahram Weekly.

Such factors need to be closely monitored in the case of the dollar, in conjunction with the rising weight of the economies of the countries of the Global South.  Another factor to consider is the use of information technology in the development of digital currencies, whether cryptocurrencies or the official digital currencies that are being set up ready to be put into circulation, the most important being the one China is working on through its own central bank and in collaboration with others.

There are also growing bilateral arrangements for settling international transactions in local currencies without using the dollar.

Until the next article on the interplay between these factors in determining the future of the dollar, it should be stressed that attempts to set the price of a domestic currency vis-à-vis the dollar are not a substitute for what it really takes to enhance a currency’s value, namely improving the economy through more investment, higher production, better competitiveness and a stronger export trade.

Switching from one currency to another for international transactions will not improve an economy that performs poorly in substance.


This article appeared in Arabic in Wednesday’s edition of Asharq Al-Awsat.

* A version of this article appears in print in the 16 November, 2023 edition of Al-Ahram Weekly

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