Here's Why Dollar Dominance Is In Question

Published Sep 13, 2024, 11:35 AM

 The world runs on dollars. It's the most commonly used currency in international transactions, an important reserve for central banks around the world, and a safe haven in troubled times. There are, however, some countries trying to move away from King Dollar, so what effect is it having? Bloomberg's Senior Washington Correspondent Saleha Mohsin wrote a book on the subject, called 'Paper Soldiers'. She joins Stephen Carroll to discuss. 

Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carroll, and this is Here's Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg. In the global economy, the dollar is king.

We said that the king dollar is back. King dollar is back for European currencies. Right so now the European currencies that you can central bags are more or less done with rate hikes. We think that it's time for the markets to think about rip cuts for the currencies, which will undermine them.

I still think it is king dollar. I mean right now, Wait, yeah, I mean the bottom line is we're high. We're high already relative these other currencies and going higher. So I don't see the big drag on the dollar. Let's put it that way.

The US dollar is the closest thing there is to a global currency. It's the most commonly used unit in international transacts, the main reserve for central banks around the world, and it's a safe haven in troubled times. But there is a gradual move away from the green back happening in some parts of the world, and it's slowly gaining traction.

People have to understand people and policy have to understand that position the dollar enjoys.

There's no entitlement to that. It's not like a guarantee, and you can't you don't want to test people's confidence in that.

Here's why the dollar's dominance is in question. Our senior Washington correspondent Salamosen, who's written a book on this subject, joins me now for more, Hayzally, great to have you with us. Has the dollar always been such a key part of the global economy?

Not forever. It's been a key part of the economy since about nineteen forty four. So as the Second World War ended, forty four nations came together and they decided, we can't let these wars happen again, and if our economies are deeply connected, it'll be that much harder for us to go to war with each other. So the dollar became the anchor to that. That was the Breton Woods meeting in nineteen forty four, and since then, the dollar and the US has been on a journey gaining the cloud that it has now and then testing the power that it's got.

So fast forward to twenty twenty four. Who's trying to move away from the dollar now and what sort of success are they having.

It's a China led coalition known as the Bricks plus Brazil, Russia, India, China, South Africa and a lot of other countries from the Gulf States and others are starting to join the Bricks group. They have a very clear objective that we want to dedollarize. The brass tacks though, are that no country has actually abandoned the dollar right now. There's a lot of rhetoric, not as much talk, but still this is something worth paying attention to because the pipelines in the global financial plumbing system, those pipes to work around the dollar are being created, and that is pretty key to be watching.

So what are the alternatives then that these countries are looking at to replace the dollar in its global role.

The most obvious two that come up are China and the Euro. Both of them are missing key attributes to become the leader and replace the dollar. The Euro does not have the depth of debt instruments, China does not have the transparency and I do have to mention people love to talk about bitcoin or crypto, but unless something is backed by the government, investors are not going to give it. The reserve asset status.

Okay, so those are some of the other options. This is an issue though, dedollarization that's come up in the US presidential election campaign. Does the United States need to worry about the dollar falling out of favor?

It does. The dollar and its status gives the US so much power that complacency is not a good thing. Our low interest rates on our debt, whether we are financing debt to finance public spending or just credit card debt and mortgage loans, all of that debt is way lower than it actually would be in a country with our fiscal profile. Because we are the owner of the world's reserve asset, and it gives us economic and geopolitical prowess. So we have to be judicious and how it's weaponized and always be protective. The US also seems worried. Treasury officials and even Fed officials have gone into a defensive posture when talking about the dollar, and we hear former President Donald Trump talking about it more and more. And that's because we stand to lose a lot if the dollar loses its power overseas.

Okay, so there's a potential risk there, but the process, it sounds like it is still quite a long way from having any meaningful effect. What could change that? What could speed it up?

Yeah? Right now, Like I said earlier, no country has actually abandoned the dollar. But for the first time in many, many decades, the conversation is happening. There's papers flying, there's you know, summits around the world happening around should we move away from the dollar? How do we do it? And I've always said that while people think that anything happening overseas outside of the US could move the de dollarization bid faster, like China creating a new currency, a joint currency for the bricks Nations or something like that, I actually think that the process would be sped up by something that happens internally in the US. It's volatility in US policymaking and the pillars of our democracy that could actually put a real dent in the dollar. The dollar is the rule's reserve asset because investors see that the US is a free and fair democracy. We have independent institutions, a press, free and fair elections, a court system that's fair. If those pillars start to come down and the US cannot be trusted to uphold democracy and predictability, then that is going to slowly start to put it more and more chinks in the armor.

Of the dollar. But this would be something that would need a fairly major event, surely to change an attitude that's been in place, and as you say, the plumbing of the global financial system that had been in place for so many decades.

Yeah. If you look at history the last two worlds reserve asset, it was the Dutch florin and after that it was the British pound, And for both of those it was a major economic event that triggered the shift away from those currencies being the world's reserve asset. So that pattern tells us that it would take a major event to start that cascade.

Now, you spent a lot of time researching the dollar for your book, Paper Soldiers. Are there any fun facts about the dollar that we might not know about already?

I covered the Treasure department for six years be where I wrote that book, and one thing I learned was that reporters will ask a treasure secretary about the dollar what their view of it is at any given point. My favorite two moments are one when one secretary was in a high school gym in Ohio. This was I believe it was John Snow who was in a high school gym in Ohio taking questions and a high school student asked him, and he pointed, looked over to his reporters and said, you put this high school student up to this. And another Chasure secretary was buying build a Bears for his grandchildren. And while he's holding these two boxes those little houses with bears in them, someone lobbed a dollar.

Question.

Adam, I love it. We SHU need to find that high school student now and see how they ended up doing a fascinating story. Thanks so much for joining us. Our senior Washington correspondent Salia Mosen joining us there. And if you'd like to read Salay's book on the subject, it's called Paper Soldiers. How the weaponization of the Dollar changed the world. Order for more explanations like this from our team of twenty seven hundred journalists and analysts around the world. Search for Quick Take on the Bloomberg website or Bloomberg Business app. I'm Stephen Caroll. This is Here's why. I'll be back next week with more. Thanks for listening.

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