The Great Dollar Debacle

By Dan Steinbock

The share of U.S. dollar in international payments is disproportionate relative to America’s eroding global position and depends on international goodwill that Washington is shunning. U.S. dollar is changing from a safe haven to a safe house that’s costly and vulnerable. The end of America’s “exorbitant privilege” looms in the horizon.


The privileged position of the U.S. dollar relies on international multilateralism, which shuns unilateralism but which is being undermined by the Trump administration’s “America First” doctrine and the polarized U.S. economy.

Washington’s contested sanctions and tariff hikes are putting U.S. dollar at risk as a global currency reserve. You can’t have your cake and eat it, too.

Anomalies herald a paradigm shift.  


The Euro Anomaly            

Not only does the U.S. dollar undermine the interests of major advanced economies. It also penalises the future of emerging and developing economies.

In early fall, as trade tensions once again escalated between the Trump White House and Brussels, the outgoing European Commission President Claude Juncker gave an exceptional speech that raised the eyebrows across the Atlantic: “It is absurd that Europe pays for 80 percent of its energy import bill – worth 300 billion euros a year – in U.S. dollars when only roughly 2 percent of our energy imports come from the United States… The euro must become the face and the instrument of a new, more sovereign Europe.”

Juncker is not just any politician. The Luxembourgian was the longest-serving head of any national government in the European Union (EU). From 2005 to 2013, he served as the first permanent President of the Eurogroup, the elite of finance ministers. In Brussels, his tenure encompassed the climax of the global financial crisis and the European sovereign debt crisis. That’s when Europeans had to come up with real collateral for lost assets, whereas in the U.S., the Bureau of Engraving and Printing needed just a few cents to produce a $100 bill. Decades ago, alternatives were few. But that’s no longer the case.

Not only does the U.S. dollar undermine the interests of major advanced economies. It also penalises the future of emerging and developing economies.


The Emerging Market Anomaly                        

Recently, foreign exchange rates in emerging economies – particularly Argentina, Turkey, Brazil, and Russia – have suffered significant damage, due to the strengthening U.S. dollar. In each case, geopolitics has played a vital role, from Argentina’s economic destabilisation and Brazil’s soft coup to Turkey’s currency pressures and rounds of U.S. sanctions against Russia. Internationally, the dollar has been fueled by the Fed’s rate hikes, oil price increases, and Trump’s trade wars.

While some of these conditions also apply to Asia’s rapidly-growing emerging economies – including India, Indonesia, and Philippines – their strong fundamentals would not seem to warrant so severe penalties. Indeed, as Modi’s India, Widodo’s Indonesia and Duterte’s Philippines are well-positioned for the future, why are their exchange markets chastised?

In each case, there are some internal pressures (e.g., rising inflation, current account deficit, delayed infrastructure projects, etc), but these explain only part of the story. Intriguingly, in the late summer, emerging markets’ currency sell-off was focussed against the U.S.bilaterally. Among each other, these currencies canceled out most of the adjustment in terms of trade-weighted real effective exchange rate (REER), which generated more moderate outcomes.

In brief, a large advanced economy, in which fundamentals are deteriorating, is causing collateral damage in the world’s most rapidly-growing economies, which have lower relative debt, budget deficit and current account than the U.S.

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About the Author

Dr Dan Steinbock is an internationally recognised expert of the multipolar world focussing on international business, international relations, investment and risk among the major advanced economies and large emerging economies. In addition to his global consultancy, Difference Group Ltd, he has served in India China and America Institute (U.S.), Shanghai Institutes for International Studies (China) and the EU Center (Singapore) while cooperating with leading universities and think-tanks in the U.S. and all world regions.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.