The dollar remains the world currency, with half of the $2 trillion bills in circulation outside the US. In many countries, everyday retail use replaces the local currency. About 40% of the world’s debt is issued in dollars. It gives the US an exorbitant privilege. The huge current account deficit is much less of a problem, as the imports that gobble up the voracious consumer sector are often bought in dollars. It also confers an enormous amount of scrutiny, as any institution or person on the wrong side of the long arm of the US Treasury can attest.
But it also means that the US acts as the global lender of last resort. Nearly 60% of global currency reserves are in dollars, with the euro in second place at 20%. Nearly 90% of all currency transactions involve the dollar. The global pandemic stimulus response was aided by massive currency swaps between the Federal Reserve and friendly central banks.
While trade-weighted strength has declined recently, it’s no coincidence that the greenback has strengthened for most of the period since the global financial crisis. The cryptocurrency’s recent crash underscores how difficult it is to take on the reigning champion. The US economy, along with its bonds and stocks, has become the preferred haven for global investors in both bad and good economic times – a phenomenon known as the dollar smile.
The greater threat to the dollar’s status has been suggested by China and Saudi Arabia trading hydrocarbons in non-dollars. Saudi Arabia has replaced Russia as Beijing’s largest source of crude oil, supplying 15% of the 350 million barrels China bought in December alone.
Old barter can work for Chinese trade with Russia, and even Iran. But Saudi Arabia is unlikely to use much for Chinese products or yuan, for the equivalent annual $50 billion worth of crude oil it exports to the world’s second-largest economy. Euro billing can solve part of the equation, but there are also limits. Saudi Arabia needs to get a return on its currency holdings; US government bonds not only yield more than Chinese or European government bonds, but also benefit from being probably the most liquid securities in the world.
The dominance of the US currency would be undermined if a rival petro currency emerged. But there are very good reasons why the vast majority of global hydrocarbon trade is and will continue to be dollar-denominated. The Organization of Petroleum Exporting Countries, now with Russia partially in the fold, is unable to control the price or supply of crude oil. It doesn’t have the chops to establish a rival currency.
The obvious benefits for the money are familiarity and scale. Size matters: about 40% of world trade is billed in dollars, four times more than the US share of world trade. The dollar accounts for 42% of the volume on the SWIFT network for interbank transactions. The share of the yuan is 2%. The euro represents an impressive 36%, but these are mostly intra-eurozone affairs between the 20 members of the single currency. The share of the euro in world trade is a more modest 16%. There is simply no traction for alternatives to the dollar outside the respective domestic zones of influence.
The domestic need to control one’s own currency far outweighs the elusive charms of being part of a supranational network; witness the doubts that remain about the fitness of the euro for its intended purpose, given the economic differences between the Member States. Until and unless the great Asian powers of India, China, Japan and Korea decide to create a new currency, the dollar will remain the world currency of first resort.
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This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Prior to that, he was chief markets strategist for Haitong Securities in London.
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