Is US dollar’s era of global dominance set to end?

By Ng Yau Man David Source:Global Times Published: 2018/9/6 19:13:41

Illustration: Xia Qing/GT


As the US frequently slaps unilateral trade protectionism measures on other economies and could easily threaten yet others with economic and financial sanctions, many countries - including France, Germany, Turkey and Iran - have proposed to withdraw from the US dollar-based system and build a payments system independent of the dollar.

According to data from the Society for Worldwide Interbank Financial Telecommunication, the US dollar's share in international payments stood at 39.85 percent in 2017, compared with the euro's 35.66 percent, the pound's 7.07 percent, the yen's 2.96 percent and the yuan's 1.61 percent.

The dollar is still the dominant international trade currency, while the euro is a payments currency to be reckoned with. Also, dollar-denominated assets account for nearly 70 percent of global foreign exchange reserves, so the US currency is still dominant.

But in terms of international trade, along with changes in the production and foreign trade of the US as a percentage of the global total, it is likely that the dollar's share of international trade payments will continue falling. The share of dollar-denominated assets in international reserves is one of the main reasons for the dollar's hegemony. This situation is mainly due to the dollar's position as a major international payments currency, with all countries and companies forced to hold the US currency for international trade settlements.

But a growing number of countries across the globe are opposing US economic and trade policy, putting the US in a rare isolated position. A proposed new payments system independent of the dollar could strike hard at the currency's international hegemony. Certainly, this doesn't mean that international trade will bid farewell to the dollar overnight, but it's probable that we may embark on a post-dollar era, meaning currencies other than the dollar will gain greater use in international trade settlements.

I would argue that payment institutions as part of the new payments system, if created, might be set up in European and Asian cities like Frankfurt, Paris and Shanghai. For instance, Germany is a major manufacturing and exporting power, so it's naturally seen as an influential player in international trade. Still, the power of a single nation is limited. Facing US trade bullying, there is a chance that European countries including Germany, France, Britain and Russia, and East Asian countries such as China, Japan and South Korea could join hands to build a new international payments system. The combined size of these economies and their trade is undoubtedly greater than the respective figures for the US.

In Asia, although there are disagreements between China and Japan in some aspects, the two countries still have common interests in maintaining multilateralism and fighting protectionism.

International creditworthiness reflects mutual trust. Escalating domestic conflicts and mercurial foreign policy will contribute little to the US' sovereign creditworthiness. Frequently resorting to trade wars will also result in the US isolating itself from the international trade system. Trade between European and Asian economies won't stop however, and when such trade becomes significant enough, there will surely be a greater number of transactions denominated in currencies other than the dollar.

If US protectionism continues, it is highly likely that the dollar as global trade currency will be waning by 2019 to the extent that the euro might unseat the dollar as the top trade currency globally.

If things continue this way, the dollar's position as a major settlement and reserve currency might be weakened and its reliance on foreign creditors to prop up domestic consumption would be unsustainable.

A new vision might emerge then in the global currency markets that would be described as the post-dollar era. China, an advocate of multilateralism and fair trade, would inevitably be acknowledged as an active participant in defense of international free trade and the creation of a new institutional mechanism.

The author is a commentator based in Hong Kong.


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