From a financial perspective, America’s hegemony is fortified not by its military might, but its currency.
Iran and Russia might know better.
The central role US banks and the dollar play in the global economy means that American politicians can exert leverage by imposing sanctions on countries, people or companies.
Violators might see their American-based assets blocked or lose the ability to move money to or through accounts held in the US.
The European Union has for long sought to strengthen the international role of the euro.
The aim: Erode the dominance of the US dollar and to insulate the bloc from financial risks, including US sanctions.
Not only the EU, countries such as China and Russia are always looking to subvert the greenback’s hegemony with some occasional success.
Those attempts notwithstanding, here’s the undeniable reality: Dollar is the king, still.
The US has historically maintained a strong dollar policy. And the greenback has an overarching sway over the financial world.
The US currency is on one side of almost 90% of foreign-exchange transactions and accounts for two-thirds of international debt. Virtually all international trades in oil are priced in dollars.
Already the world’s reserve currency, the dollar’s hold over the world of foreign exchange has grown even stronger during the Covid-19 pandemic.
When the markets are teetering, investors view the US currency as the safest haven, even more so than gold, the yen or the Swiss franc.
As the grim economic implications of the virus outbreak strained markets across the world, demand for the dollar soared, pushing other currencies lower.
It’s, indeed, hard to dethrone the mighty dollar.
Any move away from the greenback involves bother and expense. Shifting to the euro, yuan or rouble means higher costs and difficulty finding banks to handle business.
Faced with US sanctions, Russia did try to loosen the dollar’s grip. The country now has a higher share of reserves in euros (30%) than in dollars (23%).
The euro has also overtaken the dollar as Russia’s main currency in trade with China and is close to doing the same in trade with the EU.
But all these came at a cost. When the dollar rallied last March, the value of Russia’s international reserves plunged by 5% in a week.
Chinese President Xi Jinping has always described “hegemonism” as a global challenge. Still, the yuan accounted for just 4% of currency trades in 2019.
The euro, which was involved in 32% of FX transactions in 2019, is the only currency that comes anywhere close to the dollar. But the single currency’s allure was undermined by the region’s 2010 sovereign debt crisis and the European Central Bank’s use of negative interest rates.
Under former president Donald Trump’s “America First” manifesto, the so-called strong dollar policy was shoved aside, as gains in the currency crimped US exports and hurt the earnings of America’s multinational companies.
Janet Yellen, President Joe Biden’s pick for Treasury secretary, has signalled that she would return stability and predictability to the $6.6tn-a-day currency market.
The dollar’s dominant status as a global reserve currency means that other countries also rely on its stability.
Longer term, investors should also keep in mind how a strong-versus-weak-dollar equation impacts their investments.
