The Continuing Dominance of the Dollar

Yves here. While this article gives a useful recap of the status of the dollar overseas, it skips over a, and arguably the reason for its continued supremacy. For a currency to function as a reserve currency, there need to be large stocks of it in foreign hands. That happens only if the currency issuing country runs significant trade deficits over time. That is anathema to most countries, who either have mercantilist trad policies or at least want to avoid running trade deficits. They recognize that a trade deficit exports demand and is tantamount to exporting jobs.

By Joseph Joyce. Originally published at Angry Bear

Ten years after the global financial crisis, we are still coming to an understanding of how profound a shock it was. The changes in political alignments within and across nations and the diminished public support for globalization continue. But one aspect of the financial system has not changed: the dominance of the U.S. dollar in the monetary system.

An article by Fernando Eguren Martin, Mayukh Mukhopadhyay and Carlos van Hombeeck of the Bank of England in the BOE’s Quarterly Bulletin documents the different international roles of the dollar. First, it continues to be the main currency in central bank reserves, with a share of about 70% of total holdings. Second, the dollar is used as an invoicing currency for many international transactions, such as commodity sales. Third, firms outside the U.S. obtain funding through dollar-denominated bank loans and debts.

The use of the dollar for finance has also been examined by Iñaki Aldasoro and Torsten Ehlers of the Bank for International Settlements in an article in the BIS Quarterly Review. They report a rise in the use of international debt securities, driven primarily by dollar denominated debt issued by non-U.S. residents. The increase in such funding is particularly noticeable in emerging markets economies in Asia and Latin America. This debt includes sovereign bonds issued by governments that sought to lock in low interest rates.

What about the alternatives? A report on the international role of the euro issued by the European Central Bank acknowledges the primacy of the dollar. An index of the global status of the euro developed at the ECB shows a decline in the last fifteen years, which may have stabilized in the most recent year. This includes a fall in the euro’s share of international debt securities. The report also notes that the deleveraging of Eurozone banks as they built up their capital ratios led these banks to reduce their cross-border lending.

Why does the dollar continue to possess a hegemonic status a decade after the crisis that seemed to signal an end to U.S.-U.K. dominated finance? Gillian Tett of the Financial Times offers several reasons. The first is the global reach of U.S. based banks. U.S. banks are seen as stable, particularly when compared to European banks. Any listing of the largest international banks will be dominated by Chinese banks, and these institutions have expanded their international business.  But the Chinese banks will conduct business in dollars when necessary. Tett’s second reason is the relative strength of the U.S. economy, which grew at a 4.1% pace in the second quarter. The third reason is the liquidity and credibility of U.S. financial markets, which are superior to those of any rivals.

The U.S. benefits from its financial dominance in several ways. Jeff Sachs of Columbia Universitypoints out that the cost of financing government deficits is lower due to the acceptance of U.S. Treasury securities as “riskless assets.” U.S. banks and other institutions earn profits on their foreign operations. In addition, the use of our banking network for international transactions provides the U.S. government with a powerful foreign policy tool in the form of sanctions that exclude foreign individuals, firms or governments from this network.

There are risks to the system with this dependence. As U.S. interest rates continue to rise, loans that seemed reasonable before now become harder to finance. The burden of dollar-denominated debt also increases as the dollar appreciates. These developments exacerbate the repercussions of policy mistakes in Argentina and Turkey, but also affect other countries as well.

The IMF in its latest Global Financial Stability (see also here) identifies another potential destabilizing feature of the current system. The IMF reports that the U.S. dollar balance sheets of non-U.S. banks show a reliance on short-term or wholesale funding. This reliance leaves the banks vulnerable to a liquidity freeze. The IMF is particularly concerned about the use of foreign exchange swaps, as swap markets can be quite volatile. While central banks have stablished their own network of swap lines, these have been criticized.

The status of the dollar as the primary international currency is not welcomed by foreign governments. The Russian government, for example, is seeking to use other currencies for its international commerce. China and Turkey have offered some support, but China is invested in promoting the use of its own currency. In addition, Russia’s dependence on its oil exports will keep it tied to the dollar.

But interest in formulating a new international payments system has now spread outside of Russia and China. Germany’s Foreign Minister Heiko Maas has called for the establishment of “U.S. independent payment channels” that would allow European firms to continue to deal with Iran despite the U.S. sanctions on that country. Chinese electronic payments systems are being used in Europe and the U.S. The dollar may not be replaced, but it may have to share its role as an international currency with other forms of payment if foreign nations calculate that the benefits of a new system outweigh its cost. Until now that calculation has always favored the dollar, but the reassessment of globalization initiated by the Trump administration may have lead to unexpected consequences.

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  1. Wukchumni

    All currencies currently exhibit the emperor’s new clothes, how well dressed the king is!

    There is nothing there, it’s a fiat accompli.

    Eventually the world will catch on and wonder why one ensemble is better than another ensemble that was fashionable once upon a time.

    What it’ll take to happen, we’ll just have to find out.

    1. Ginavon

      President Trump announced in Sept of 2018 that September is national preparedness month. In October 2018 President Trump ran a test of the emergency system…perhaps the president, who has the highest security clearances in the world knows something we don’t?

    2. Plenue

      Your fundamental mistake is in assuming any form of money has a’ there’ to begin with. That money can have some aspect that makes it intrinsically valuable, as opposed to it just being a credit measuring device. Money is a social tool that only has worth at the time of transaction and when all the parties involved mutually accept that it has worth.

      You can go ahead and get all the gold or silver or whatever ‘real money’ you want. Just don’t be surprised when no one in the post-apocalyptic wasteland is impressed by your shiny rocks.

      Also I expect you’ll be saying ‘the emperor has no clothes, the end is nigh!’ this time next year, and this time ten years from now, and so on. And the rest of us will still be waiting for your prediction to show the remotest sign of coming true.

      You do you though. The torch of Jim Haygood’s monetary illiteracy needs to be carried by someone, I suppose.

  2. Ginavon

    23 countries have stopped using the petroleum US dollar. The federal reserve fiat money system is going to die.

    1. Oregoncharles

      Names? What are they using instead?

      While fiat currency facilitates the dollar’s use as a reserve, it isn’t dependent on it. It’s just a fact of a sovereign currency – the British, Russian, and Chinese currencies are, too, along with many others.

    2. jsn

      The transactions going this route I’m aware of are all specifically negotiated. The transaction costs are orders of magnitude higher than they would be using dollars, but the sanctions regimes make them profitable where used.

      Without another country distributing it’s currency as broadly as the US has, no other currency can offer the liquidity. Its really very simple.

      Bear in mind what the US “National Debt” is: it is the inventory of dollar denominated financial instruments in the world, mostly bonds, but also other government securities and cash. To “eliminate” this “debt” would be to deprive non US govt actors across the world of dollar assets. (this would of course include US investors and everyone using dollars as cash)

      The post war Marshall plans after WW2 granted dollars to he rest of the world. By the 70s, the recovery that had funded was drawing down US gold stock. Nixon put us on fiat and since then the US, through the IMF, World Bank and BIS has extorted the rest of the world into holding onto the dollar assets they had or acquire more through textbook predatory finance: as a foreign nation, once you take a dollar loan you cannot maintain any fiscal independence without huge stocks of dollar assets with the Fed.

      While finance did great with this, in the post gold world this policy did export jobs, but all that money is still out there, actually on the Feds balance sheet so really it’s still here, but it forms a liquidity for international capital flows no other currency is willing to offer because of the abandonment of full employment policies that are the necessary corollary.

  3. MisterMr

    “They recognize that a trade deficit exports demand and is tantamount to exporting jobs.”

    Yes but, this is true only if the policies that cause the trade deficit are not creating jobs by themselves.


    Govt. of USA deficit-spends 5% of G.D.P.
    Of this additional buying power, 3% goes into the internal economy and creates jobs in the USA, the other 2% goes to buy stuff in the EU and creates jobs in the EU.

    On the other hand, EU governments go for austerity and therefore become net exporters (because they are stifling internal consumption), but then create a lot of unemployment for themselves.

    I say this because I think that this idea about net exports being a boon for jobs is a bit oversold: for example Italy is currently a net exporter but, as it became a n.e. by stifling internal consumption, this is actually bad for jobs.

    So net exports might be good for jobs, but only in some conditions.

    1. Synoia


      IMHO there is no tantamount to it.

    2. John k

      Romania was a freak case where the ruler decided to run a trade surplus on the back of local austerity, exporting chickens while retaining the feet for locals.

      1. Wukchumni

        The Romanian economy of the 70’s & 80’s pretty much ran on one brand of cigarettes: Kent

        BUCHAREST, ROMANIA — “It was my last resort,” an American tourist said in a tale of his frustrating search for a taxicab here. Car after car barreled past him down Calea Victoriei before he finally pulled it from his pocket, stopping a driver dead in his tracks.

        In Romania, a pack of Kent cigarettes can work wonders.

        This socialist country’s unofficial currency, Kents have been used not only to grab cabs in heavy traffic, but to buy an endless range of other goods and services, including a hospital operation, a massage and a decent cut of meat.

        According to Romanians, payment in American cigarettes is often preferable to money. The lei, Romania’s official currency, has been so overvalued that it is “too common to use for some purchases,” as a Romanian schoolteacher put it. Dollars, deutsche marks and those western currencies used for black-market trade in other Soviet bloc countries are banned from public possession in Communist-ruled Romania.

  4. Richard Graham

    The US dollar’s most valuable asset are Treasury Bonds that are ASSUMED to be RISKLESS. Anyone remember the 2008 Financial Fraud Crisis were it was assumed that residential property would always rise in value, that loans based on property could be sliced and diced into bonds, that bond rating agencies knew how to recognize value, and that buying insurance for these bonds removed all risk from the economy, and that AIG management knew how to manage AIG’s risk.
    What this massive fraud and Trumps’s election show is obvious. We can no longer pretend Americans know anything about the world, their own best interests, or the best interests of their strongest allies and best friends. They can’t be expected to defend democracy, expand human rights, or manage the most important part of world’s economy. It is inevitable that US Treasuries will become worthless as US society collapses.

    1. Synoia

      TBills are risk-less. The only promise is exchange them for dollars.

      As Wray points out, TBills are an interest bearing dollar account at the Fed.

    2. todde

      how do we get around the 14th Amendment?

      Perry vs the United States seems to say that the debt can be repaid with inflated dollars.

      And if US Society collapses, the least of my issues will be US Treasuries.

  5. Chauncey Gardiner

    As Warren Mosler has said, “The real wealth of a nation is all it produces and keeps for itself, plus all it imports, minus what it must export. A trade deficit, in fact, increases our real standard of living.” The role of the dollar as a global reserve currency, for settlements in the global payments system, and in global securities markets, has enabled this.

    But although Mosler is right in one sense, I believe this policy comes at significant hidden long-term social, economic and geopolitical costs in that it ignores the longer term effects that stem from erosion of the country’s industrial base (and the military costs). Three decades of trade deficits and transference of entire industries, intellectual property and related know-how to other countries eventually leaves a nation an empty shell, stripped of both capacity and capability, as we have seen in much of the U.S. heartland, and as Intel’s then CEO Andy Grove predicted would happen way back in the 1980s.

    Denial of access to dollars has also been used as a tool to enforce narrow foreign policy objectives through unilateral imposition of sanctions by the executive branch of the US government. I am unaware of any legislative oversight or approval of these sanctions, which are causing both shortages of necessities in the populations of targeted countries, leading to resentment and efforts by their respective governments to develop workarounds, as the author of the article mentioned.

    1. Janie

      About 10 years ago a friend who worked for Red Wing shoes said that only 3 percent of shoes sold in this country were made here. He wondered where new military boots would come from in an emergency. Today it’s 2 percent; 50 years ago 95 percent were made here, according to google.

      1. AbateMagicThinking But Not Money

        Re Janie’s mil. spec. footwear musings.

        Back the UK parades are enlivened by collapsing guardsmen whose magnificently absurd anachronistic costumes seemingly lead to over-heating and fainting.

        Here in Australia military parades are enlivened by the practice of buying special parade footwear from dubious sources. Uppers frequently detach from soles, so that marchers suddenly have to contend with flapping footwear. Not so easy to spot, but a hoot all the same, and with less chance of lasting damage.

        Nazi uniforms are very smart to my eyes, so that nowadays I equate smartness with being a symptom of total moral and military collapse.

        Check out the uniform of the praetorian guard wherever you live.


        1. Wukchumni

          One thing I see occasionally with local law enforcement is the blousing of pants-which is something a paratrooper does, but looks strange on a fancier of doughnuts

    2. todde

      except the transaction doesn’t end there.

      We trade capital assets and debt for trade goods when we run a trade deficit. Those dollars come back and basically buy our future from us.

      The segment of our economy that ‘manufacturers’ capital assets (Wall Street) is doing well manufacturing CDOs and interest rate swaps, while the rest of us get cheap shit from China and and a future
      of expenditures in dividends and interest paid to someone else.

  6. Altandmain

    There is another big drawback. The US dollar is a lot stronger than it should be.

    This means that export is lower than it might otherwise be. Another issue is that it represents a subsidy effectively for imports from other nations.

    Apart from manufacturing, the strong US dollar means that the revenues from tourism are lower than they could be.

    As the comment above me by Chauncey has noted, this has also led to a lot of losses in technological leadership.

    A lot of it too is also based on American corporations rent seeking. There have been cuts to research and development. Profits these days tend to be funneled into share buybacks.


    That is why China, which is very reliant on exported goods may be reluctant to take up the reserve currency status and displace the US dollar.

    Same with the Euro. I doubt that Germany wants a strong Euro for that reason. Plus the EU itself has in many ways become a Germany colony due to the exports.

  7. John

    A part of the problem is the neoliberal delusion that Mr. Free Market is rational, fair, and is better than government bureaucrats in making policy. Hence we give away our industrial base to China without much reservation for 20 years and then start having second thoughts. Long term planning (industrial policy anyone?) combined with modest and sane regulation would have found a middle way to send some of the industrial base to China while retaining some for internal jobs.
    We can’t do that because the US oligarchy does not care about the working class and figures they can eat their bootstraps. It will not end well.

  8. Catullus

    Not sure where my other comment went – it was excessively long. Sorry about that length.

    Let me make it much much shorter and sorta goes to the root of the problem:

    Know this old saying: “Separation of Church and State”?

    A new one that I learned from other Bitcoiners that I agree with:

    Separation of Currency and State.

    In short, the state should not create nor issue currency. I used to believe in MMT but no longer because it enables abuse by the State. So therefore Separation of Currency and State (sometimes said as Separation of Money and State)…

    This is likely the last Hurrah for the US Dollar. It is too painful to last. Nobody wants to replace the USD. So that’s where Bitcoin will come in. SDRs don’t count because… a basket of currency controlled by states and thus subject to the same problem as the USD currently experiences.

    1. paulmeli

      Without public investment half the population would be out of work. Is bitcoin going to replace that?

      It can’t and won’t.

      Private transactions cannot fully employ the citizens, at most it accounts for about 40% of total spending. There would be little motivation to invest if there was no new money on the table to win. Where would gains (profit) come from?

      1. MyLessThanPrimeBeef

        That separation is the main issue with MMT (Modern Monetary Theory).

        Should it be work guarantee (government to spend) or basic income or more (the people to spend)?

        Most people think of theory as describing something in nature that is there naturally, forever, and not changeable (for example, we can’t change gravity but we can describe how it works with the Theory of Gravity).

        But here, the monetary system is something we set up, and we can change it.

        Basic income, people’s QE, or more generally, money creation via, exclusively, the people, not the government, spending it into existence is one option.

        And the people can spend to put the government to work, if the government is out of work, or needs more money beyond its household budget (in that hypothetical setup).

    2. Malcolm McIntyre

      where will come this nirvana that excludes abusive states? states are what give currencies legitimacy and bitcoin and others will be stomped as soon as they have sufficiently prepared the way for state digital currencies. this outcome was perceivable a decade ago and now is hammering on your door. why do u not see it?

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