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US Federal Reserve: The dollar is the monetary anchor of the world.
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Photo: JIM LO SCALZO / EPA-EFE
The dollar is still the world's monetary anchor.
This is another reason why the West was able to impose tough, global financial sanctions on Russia because of the Ukraine invasion.
However, there are now some signs that the dollar's dominance may be coming to an end.
There are three main factors that raise doubts:
Inflation can do lasting damage to international confidence in the value of the dollar.
Consumer prices in the USA are currently rising at a rate of eight percent – and the trend is increasing.
America overheats.
What matters now is how decisively the US Federal Reserve takes action against it.
(Watch out for Wednesday's Fed meeting.)
The sharpest weapon in the arsenal of sanctions against Russia is the freezing of Moscow's currency reserves at other central banks, a step that has never been taken in this form before.
Should fears then spread that Washington could have currency assets confiscated at any time, this could cause massive damage to the dollar.
The economic power tectonics are shifting rapidly as a result of the Russian aggression – away from US-inspired global institutions towards a new bloc formation with fragmented financial markets.
It would not be surprising if this change were reflected in the currency market.
Descent of a super money
Admittedly, there have been discussions about the decline of American supermoney for more than 50 years.
And there were certainly enough reasons: In 1971, the Bretton Woods system collapsed, in which the other western currencies revolved around the dollar (which was still gold-backed at the time) as the central star.
This marked the beginning of the »great inflation« phase.
It ended when the Fed raised interest rates dramatically in the early 1980s, causing global turbulence.
In the 1980s, the United States went from being the world's largest creditor to becoming the world's largest debtor - and this did not detract from the global status of its currency.
Alternatives to the dollar were considered: In the 1980s, Japan's economic rise seemed to point to a strong international role for the yen.
Have all these developments decimated the role of the dollar?
Not really.
But then the upheavals became more violent: The global financial crisis of 2008 had its origins in the US financial system.
In 2011, the rating agencies downgraded the creditworthiness of the USA: At that time, Washington lost the top rating of AAA, which Germany, for example, still enjoys.
Political polarization increasingly paralyzed Washington, so that the government repeatedly reached the statutory debt ceilings and many federal agencies had to temporarily stop their work ("government shutdowns").
Donald Trump's 2017 presidency may have been marked by constant attacks on the democratic institutions of the United States, while China's rapid rise as a leading power challenged America's uniqueness.
doesn't matter.
The dollar remained the monetary center of the world economy.
America's money leads, to this day -- accounting for about 60 percent of global currency reserves and international debt outstanding, 55 percent of cross-border bank credit, and more than 40 percent of foreign exchange and trade transactions.
America may not be loved by everyone, but its currency already has been.
In most disciplines, the euro is only number two by a wide margin, other currencies play practically no role, as the European Central Bank (ECB) has calculated.
memories of the present
So far, everyone has invested their money in dollars, especially in times of crisis.
Foreign exchange made in the USA is considered a safe haven and the ultimate store of value.
Ultimately, it is based on trust in the American economy, its institutions and the rule of law.
There are also network effects that have an additional stabilizing effect: the dollar is also a reserve, investment, financing and transaction currency.
Highly liquid foreign exchange markets make dollar trades possible at any time at low costs.
All of these functions reinforce each other.
Therefore, once a monetary standard has been established, it is not so easy to replace it with a new one.
Such a change in the currency standard therefore only happens every few generations – most recently after the First World War, when the British pound gradually lost its dominant international role.
The decline of sterling as world money was preceded by a long relative decline of the British Empire.
Other powers caught up economically and militarily, most notably the United States and Germany.
But the pound and the financial center London remained the financial center of the world for quite a while.
Memories of the present are awakened.
Where are we today?
Is the dollar a world currency on demand?
Slow settling movements
In any case, the freeze on Russia's central bank balances has the potential to jeopardize confidence in the dollar as a reserve currency.
What's more, this would also damage the other international functions of the dollar.
As a trading currency, it has already lost a great deal of its popularity;
other currency areas (EU, China) now handle larger trading volumes than the USA, increasingly in euros and other currencies.
For years, many central banks have been trying to spread their reserves more widely.
Gold also plays a role, although it is quite difficult to sell as the market is not particularly liquid, at least not compared to US Treasuries.
This slow move away from the dollar could be accelerated by central bank sanctions.
Certainly, there were already discussions as to whether using the dollar as a weapon would damage its status as a reserve currency in the course of Trump's measures against Iran.
However, the scale and scope of the Russia sanctions are unprecedented.
Accordingly, for countries with large currency reserves, the question arises as to whether their balances with the Fed (and other western central banks that are now participating in the sanctions) are still safe.
Since these are – to put it mildly – not all flawless democracies, the concerns are justified.
The country with by far the largest foreign exchange reserves is China.
The Saudis and the other Gulf emirates also have substantial dollar reserves.
It will have to be about developing rules for the new currency policy sanctions.
Otherwise there is a risk of wild growth and arbitrariness.
Under what conditions are central bank sanctions imposed?
Under what conditions will they be relaxed again?
So far there has been no clarity on this in the Russia conflict.
But sanctions must be conditional so that they can trigger the desired behavioral changes.
The West must be calculable in the face of an opponent who appears unpredictable.
So far, the dollar has benefited from the fact that there are no real alternatives: the euro lacks an institutional foundation.
Gold lacks liquidity;
the renminbi is not even convertible, let alone underpinned by the rule of law;
Cryptocurrencies are only a theoretical option because they lack the "soul of money" (BIS boss Agustin Carstens), i.e. the trustworthiness of state institutions.
But: Digital currencies are developing quickly, also driven by the central banks themselves - innovations that can completely change the monetary system.
Soviet Union as a role model?
In addition, there is the looming disintegration of the world into blocks.
It looks like China is on the way to establishing its own hemisphere.
If distrust in the dollar becomes too great, Beijing can develop alternative payment methods.
After all, even the Soviets once managed to establish their own pseudo-currency (»transfer ruble«) in their sphere of influence in order to offset deliveries within the »Council for Mutual Economic Aid« (COME).
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And then there is rising inflation.
No one wants to hold a reserve currency for bad times unless it's reasonably stable in value.
The Fed must therefore hurry to get the price dynamics under control.
Ultimately, the financing of the entire US economy depends on the status of the dollar.
The United States is able to run current account and budget deficits in the long term – and that means living structurally beyond its means – because half the world is willing to lend America money at very low interest rates.
France's then Finance Minister Valérie Giscard d'Estaing complained in the 1960s that this country enjoyed an "extraordinary privilege".
Various crises and wars later, little has changed.
But that doesn't mean it stays that way forever.
The most important dates of the coming week
Expand areaMonday
Oslo/Brussels –
Ready
to defend – NATO meets for the largest military exercise in a long time.
During the "Cold Response" maneuver, 30,000 land, sea and air forces practice defending Norway.
The background are the military threats from Russia.
Group results I
– business figures from Deutz, Talanx, Deutsche Leasing.
ExpandareaTuesday
Dessau-Roßlau/Berlin –
How dirty is Germany?
– The Federal Environment Agency publishes an estimate of the climate-damaging CO2 emissions for 2021.
Beijing -
Expensive raw materials
- China's statistical office presents new figures on economic development in the first two months of the year.
Group results II
– Business figures from Volkswagen, RWE, Traton, Wacker, Generali, Hennes & Mauritz.
ExpandareaWednesday
Washington -
On the brakes
- The US Federal Reserve decides on the further course of monetary policy.
It is clear that she will tighten the reins.
It is unclear to what extent this will happen.
With inflation at eight percent, the Fed is now fighting for its credibility.
Brussels -
counter pressure
- NATO defense ministers meeting in times of extreme tension.
Above all, it is about the effective deterrence of Russia.
Group results III
– Business figures from BMW, Morphosys, Inditex, Ferrexpo.
Expand areaThursday
Kiel –
Economic Outlook
– The Institute for the World Economy publishes its forecast in extremely uncertain times.
Group results IV
– Business figures from Rheinmetall, United Internet, Enel, Swatch, FedEx.
ExpandareaFriday
Luxembourg -
May
contain
traces of inflation
- The EU statistics authority Eurostat publishes key figures on labor costs in the euro area.
This could provide an indication of whether inflation dynamics are stabilizing.
Consolidated results V
– Business figures from Vonovia.
