Weekly Business Insights from Top Ten Business Magazines | Week 294 | Shaping Section | 1

Extractive summaries of and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Week 294 | April 28-May 4, 2023

The power and the limits of the American dollar

The Economist | April 27, 2023

Listen to the Extractive Summary of the Article

Every so often an appetite surges for an alternative reserve currency to the dollar—and a market booms in predictions of the greenback’s imminent demise. For nearly three-quarters of a century the dollar has at a global scale dominated trade, finance and the rainy-day reserve portfolios of central banks. Yet high inflation, fractious geopolitics and the sanctions imposed by America and its allies on countries such as Russia have lately caused dollar-doubters to become vocal once again.  Often these episodes are fuelled by a world leader’s spasm of anger towards the dollar.

Yet the doubters’ excitement has become detached from reality. The greenback exerts an almighty gravitational pull on the world economy that has not materially weakened—even if America has recently found that there are real obstacles to exploiting its currency’s pre-eminence.

The starting advantage of the dollar is immense. Between a third and a half of global trade is invoiced in dollars, a share that has been relatively stable over the long term. It is involved in nearly 90% of foreign-exchange transactions; such is the liquidity of the greenback that if you want to swap euros for Swiss francs, it can be cheaper to trade via dollars than to do so directly. About half of cross-border debt is dollar-denominated. And although the dollar’s share of central-bank reserves has fallen over the long term, it still accounts for about 60% of them. There is no sign of a dramatic recent change, save that which has been caused mechanically by central banks revaluing their portfolios to take account of exchange-rate movements and higher interest rates in America.

No other currency is close to matching this ecosystem’s size, or its fundamental appeal: the supply of safe assets available to dollar investors.  What is increasingly clear, though, is that individual countries can circumvent the dominant system if they really want to. New digital-payments technologies and central-bank digital currencies could yet make it easier to move money around the world without involving America.

Although a shift to a multipolar system of currencies is not imminent, it could occur later this century as America’s share of the world economy shrinks. Such a system would be inherently less stable than one centred on the dollar—so it would be in the interests of neither America nor the world 

to hasten the shift. 

3 key takeaways from the article

1. Every so often an appetite surges for an alternative reserve currency to the dollar—and a market booms in predictions of the greenback’s imminent demise. 
2. No other currency is close to matching this ecosystem’s size, or its fundamental appeal: the supply of safe assets available to dollar investors.  What is increasingly clear, though, is that individual countries can circumvent the dominant system if they really want to. New digital-payments technologies and central-bank digital currencies could yet make it easier to move money around the world without involving America.
3. Although a shift to a multipolar system of currencies is not imminent, it could occur later this century as America’s share of the world economy shrinks. Such a system would be inherently less stable than one centred on the dollar—so it would be in the interests of neither America nor the world to hasten the shift. 

Full Article

(Copyright)

Topics:  Global Financial System, Global Trade Currency, USA Dollar