Mike Higgins
Hello there. Welcome to Members’ Question Time, Is This the End of Dollar Dominance? These events are where Chatham House members get to put questions to one of our experts. The conversation that will follow is very much driven by you. So, thank you all for taking the trouble to join us today. My name is Mike Higgins. I’m the Editor of The World Today, Chatham House’s member magazine. I’m joined by David Lubin, Senior Research Fellow in our Global Economy and Finance Programme. David will be talking about the role of the dollar in the global economy, specifically the extent to which its pre-eminence may be said to be under threat. We have a lot to pack in in half an hour. David will talk for a few minutes first, before we open the conversation to you.
To be clear, this event is on the record and will be recorded and made available on the Chatham House website. Do please post on social media, if that’s what you’d like to do, using the #CH_Events. David and I are also on LinkedIn and X if you’re interested. Thanks very much to those of you who have already sent in questions for David. For those of you who haven’t, do post your question in the Q&A box at the bottom of the Zoom screen. Once David has finished his remarks, I’ll put a selection of those questions to him, and then at the end of the event, we’ll be holding a short poll that you’ll be able to vote on via your screen. I’ll explain details of that later.
Right now, to the question that we’ll be discussing today, is the US dollar’s dominance of the global economy coming to an end? Well, you might well ask why are we even bothering to pose that question. The dollar has been the top global currency for a century and remains so. Today it accounts for some 60% of global foreign exchange reserves, despite the fact that America contributes only, if only is the right word, only about a quarter of global GDP. The dollar is also bought or sold in nearly 90% of global foreign exchange transactions.
One part of the answer to that question, of course, is geopolitics. Russia’s full-scale invasion of Ukraine in 2022 led to various economic sanctions, most significantly, the freezing of about $300 billion worth of Russia’s foreign exchange reserves, much of which was in US dollars, and the currencies of America’s allies. No other country wants to end up in Russia’s position, to be blunt, but that recent geopolitical consideration has elevated concern about dollar dominance that has been felt for decades. The extent to which access to US capital markets for any given country is hostage to rapid changes in US monetary policy.
I should say that David has addressed aspects of this question in two recent short articles for Chatham House, one of which has just been published in the latest edition of The World Today. You’ll find both of these articles on the Chatham House website under David’s name. But to tee up today’s discussion, let me hand straight over to David Lubin. David, over to you.
David Lubin
Thank you very much, Mike, and hello, everyone. Yes, as you asked, Mike, you know, why is – why are we even having this discussion, as you suggested? The most visible reason why people are questioning dollar dominance is because of the increasing use of the dollar as a weapon, most obviously in the aftermath of Russia’s invasion of Ukraine. But the Central Banks of Iran, Afghanistan, Libya, Venezuela, have also had their foreign exchange reserves frozen by the United States and its allies. And so, this growing sense that the dollar is being weaponised is one reason why dollar dominance is coming under increasing question, as more countries might want to escape the risk of having their dollar assets sanctioned or their foreign exchange reserve sanctioned.
But there’s also, I think a, kind of, deeper, longer standing reason why dollar dominance is a source of frustration for many developing countries. And that’s because over the course of the last several decades, there’s been a, kind of, growing frustration about the way in which developing countries access to international capital markets is a, kind of, hostage to US monetary policy. When US monetary policy is tight, or when the dollar is strong, that tends to suck capital from developing countries and renders their access to international capital markets more difficult. And it’s only really when the dollar is weakening or when US monetary conditions are loose, that capital gets pushed to developing countries and developing countries find that their access to international capital markets is more robust.
So, I think the point to make, though, is that although we have these two broad reasons why developing countries are, kind of, getting fed up with dollar dominance, one geopolitical, one purely financial, wanting to end dollar dominance is not the same as achieving that objective. And I think, you know, the main point that I want to make today is that dollar dominance is very sticky. It’s a very difficult thing to budge, and a couple of points to make in the first place.
The first is that, just there’s a, sort of, historical regularity that the top currency globally tends to be printed by the dominant military power. That’s, you know, been true since Rome. It was true during the British Empire, and it’s true today. I guess, it has something to do with the rule setting ability of the dominant, military power. But, you know, currency power is a derivative of national power and guns are important in the formation of national power. Now, you might think that because China is gaining national power relative to the United States, that therefore, the renminbi should not – should, sort of – in a, sort of, linear, natural way become more and more important in the global financial system. But that problem, or that hope, that some people have is, kind of, stymied by one very important feature, which is that the distribution of currency power in the global monetary system changes much more slowly than the distribution of economic power.
To give you an illustration, you know, it was in the 1860s that the United States first became a bigger economy than Great Britain. By the eve of the First World War, the United States economy was almost two and a half times bigger than the UK’s, but it was really only after the Second World War, in other words, almost a century after the United States became the biggest economy, it was only a century – more than a century after that, that the dollar really came to dominate global financial markets. So, the point is that, you know, yeah, the distribution of currency power changes very slowly and it changes slowly because there is, kind of, inertia. There are habits formed as a result of what Economists call network effects in global currencies.
The dollar is the QWERTY keyboard of the international monetary system, or it’s the English language. In other words, it’s got, you know, the – so many people use it, so many people rely on it, so many people are familiar with it, that moving on to a different model involves very substantial costs, and those costs create inertia. In other words, they create just this, kind of, habitual, signing up to the global use of the dollar. And I would say that these days, that inertia, or the power of those network effects, is reinforced by the fact that the US dollar is fully convertible. And it is now, in this current international monetary system, a, kind of, unshakeable norm of the international monetary system that we have today that the dollar and all of the other major reserve currencies are all fully convertible. In other words, there are no restrictions on their international – or on their international use.
It’s worth bearing in mind that that’s not true by definition. During the Bretton Woods monetary system that dominated in the decades after the Second World War, the dollar, sterling, the French franc, all of these central currencies, the global international – of the global monetary system, all had capital controls. So, it’s not true by definition that a reserve currency has to be free of capital controls, but it just happens to be true today. It’s just the norm of the international monetary system that it – that reserve currencies are convertible currencies.
And in a way, one illustration of that is the fact that although the dollar’s status has diminished over the last 20/25 years – Mike, you mentioned the figure that almost 60% of global foreign exchange reserves are invested in US dollars, that figure was 70% in the year 2000. So, the dollar has lost ground in that sense over the last 20/25 years, but important to note that it’s lost ground to other convertible currencies, like the Australian dollar, the Canadian dollar, the Japanese yen, the British sterling. In other words, you know, the extent to which dollar dominance has been eroded hasn’t been a passage of currency power from the United States to China, say, but it’s rather, a passage of dollar dominance towards other convertible currencies, which it’s important to note, are printed by US allies.
So, having said all of that about the stickiness of the US dollar, are there threats to dollar dominance? Well, I guess there’s three kinds of threats that I’ll deal with just very briefly. One, is the idea that there might be such an excess supply of US dollars in the global financial system that people just get fed up with having to accumulate more and more dollar balances, and there’s a, kind of, creditors rebellion. And indeed, you know, the net foreign liabilities of the United States have grown very substantially over the last 40 years. At the beginning of the 1980s, the United States was still a net creditor to the rest of the world. These days, the United States is a net debtor to the tune of about $20 trillion, or around 70% of US GDP. So, oversupply of dollars is one possible threat.
A second possible threat is excessive weaponisation of the dollar, and, you know, the way that the United States behaved after the Russian invasion of Ukraine might have been a step too far in a sense that, you know, developing countries might become materially more fearful of dollar weaponisation. But it’s worth remembering that escaping dollar dominance is one thing, but the point about the sanctions on the Russian Central Bank in February 2022, is that it wasn’t just the United States, it was every country that prints a reserve currency in the G7 were involved in sanctioning the Russian Central Bank. So, you can escape dollar dominance, but can you escape the dominance of all reserve currencies that, as I said, are printed by US allies? That’s a much more difficult thing to do.
The final long-term threat to dollar dominance might come from technology. The one – and the one thing that I want to, kind of, mention is an initiative called mBridge, which is an initiative that’s taking place within the BIS, the Bank for International Settlements, where the Central Banks of China, of Hong Kong, of the UAE, and of Saudi Arabia and of Thailand, have pulled together to create an international platform that facilitates the exchange of local currencies in digital format across an international platform that is built on blockchain. So, it’s a blockchain based platform for the international exchange of Central Bank digital currencies.
And I think that this over the long run, might have some legs simply because it has the geopolitical advantage of escaping SWIFT. So, it – you don’t need to rely on SWIFT to transact international payments across this exchange, and it also is phenomenally efficient. It gets rid of counterparty risk. It gets rid of credit risk. It gets rid of settlement risk. All the accounting and settlement is done within the blockchain, so it’s an incredibly efficient system. So, both its efficiency advantages and its geopolitical advantages might give the international exchange of digital currencies something to look out for, to watch for, over the next few years.
That’s all I’ve got to say for the time being, Mike. What questions are there?
Mike Higgins
Well, we have – we already have a number of questions. Thank you very much, indeed, David. Just talking to your discussion about the weap – the so-called weaponisation of the dollar, Joseph Black wants to know, whether there are “signs that the US has reconsidered how it has weaponised the dollar. What else might it be able to do to achieve its interest?” In other words, how has it, sort of, changed the way it has weaponised the dollar?
David Lubin
I think, if anything, you know, the – this most dramatic weaponisation of the dollar, as we both said earlier, is the sanctioning of the Russian Central Bank after Russia’s invasion of Ukraine in February 2022. And I would say that if anything, the United States experience of that, which was that it was uniformly and very quickly joined by, as I said, every other country that prints a reserve currency, in other words the G7 – the United States G7 allies, I would say that if anything, that unity of the West that was demonstrated in the aftermath of the Russian invasion of Ukraine, if anything, empowers the United States to, kind of, make more use of the dollar as a weapon, as long as its use is joined by other allies. In other words, it was an incredibly powerful demonstration of the value of alliances. And I think that the United States, to the extent that it’s, you know, needs to, kind of, confront similar problems in the future, will look at that experience of February 2022 and say, well, that was a big success.
Mike Higgins
So, they might feel emboldened to explore…
David Lubin
Yeah.
Mike Higgins
…conceptions, whatever they might be?
David Lubin
Yeah.
Mike Higgins
We’ve had a couple of questions about the significance of de-dollarisation in the energy trade. Rosemary Griffin – I’ll put them both to you if you don’t mind, David.
David Lubin
Yeah.
Mike Higgins
Rosemary Griffin would like to know, “How significant is de-dollarisation in the energy trade? Do you expect BRICS expansion to increase the use of alternative currencies in energy trade?” And also, Kate Durin has asked, “There’s a lot of talk in the Middle East that the oil exporters could drop the petrodollar or conduct more trade with China in the yuan. Is this realistic?”
David Lubin
Not really, in my view. I mean, take Saudi Arabia. Saudi Arabia has, on average, a trade surplus with China of around $20 billion a year. Imagine that Saudi Arabia started to receive renminbi for that, you know, in exchange for its oil sales to Sau – to China. And so, it was accumulating renminbi balances of around $20 billion worth a year to pay for – as China pays for its oil imports from Saudi Arabia. Now, the Saudi riyal is pegged to the United States dollar. So, there’s two questions for the Saudi Arabians. The first is, what on earth will they do with $20 billion worth of renminbi per year, when the renminbi remains a non-convertible currency that is full of capital controls? Its international use is highly restricted. And so, you know, taking renminbi in exchange for oil sales to China limits the usefulness of the balances that Saudi Arabia accumulates as a result of those sales.
And that’s particularly true since, you know, if your currency is pegged to the dollar and you are not accumulating dollar assets to make that currency peg viable, to make that currency peg credible – I mean, that’s not a short-term threat because Saudi Arabia already has plenty of reserves to back up its peg to the dollar. But over time, there’s an inconsistency between, on the one hand, receiving tons and tons of renminbi, on the other hand, maintaining a peg to the dollar. Is there any conceivable future in which Saudi Arabia would want to repeg its currency to the renminbi? I think we’re decades away from that. So, I don’t think there’s any near-term threat.
The other, sort of, oil trade discussion that’s often referred to in this context is between Russia and India. There were some discussions in the last couple of years between Russia and India, such that Russia would receive rupees for its oil sales to India. But again, the same problem, you know, the Indian rupee is not fully convertible. What is Russia going to do with a bunch of Indian rupees when its international use is constrained? And that’s why – you know, this is why in my initial comments, I was trying to emphasise the importance of convert – currency convertibility. You know, if you’re comparing a fully convertible currency like the dollar or the Euro or the yen to a non-convertible currency, or not fully convertible currency like the renminbi or the rupee, there’s a big disadvantage to the absence of convertibility.
Now, the one – I mean, a couple additional points. The first is, I think it is absolutely, pretty much inconceivable that China will in any near-term future, make the renminbi convertible, for two reasons, really. One is that the pure economics of this. There’s a lot more Chinese money that wants to explore the rest of the world than there is the rest of the world’s money that wants to enter China. So, if China got rid of its capital controls overnight, say, tonight, the renminbi would suffer a very substantial depreciation. So, there’s a huge financial stability risk for China in moving towards eliminating or remo – or loosening its capital controls. For that reason alone, it’s not going to happen.
But I think for another reason, it’s not going to happen, which is, to do with the increasing role that – of the state and of ideology in the formation of Chinese economic policy. I think, you know, my reading of Chinese economic policymaking these days makes me think that the idea of this set of Chinese policymakers to say, “Well, you know, the exchange rate, yeah, it’s an important price, but we should let the market decide what the value of a dollar should be.” I mean, the idea that the state, the Chinese state should just let go of decision-making with respect to the exchange rate, with respect to movements of money in and out of China, just seems to me a complete non-starter. So, I think it’s very, very unlikely to happen.
But you did mention BRICS, Mike, and I think that, you know, I think it’s important to emphasise that BRICS, as an organisation, has a, kind of, basic lack of coherence in the sense that it includes both countries with an explicitly anti-Western agenda, like Iran or Russia, and it also includes countries with a non-Western agenda, like India. And it’s that that kind of, renders BRICS, in organisational terms, relatively incoherent, with one important exception. Which is the fact that, as far as I can make out, the one policy issue that unites the nine current members of BRICS and the up to 40 additional members of BRICS that are, sort of, you know, in a queue to get in, the one thing that unites all of these countries, the one policy issue that unites all of these countries, is a, sort of, common desire to escape dollar dominance.
And so, it’s very interesting. You know, the reason why I mentioned mBridge, this, kind of, blockchain-based platform to facilitate international payments of Central Bank digital currencies, the one reason why I think mBridge is worth – is an initiative worth following, is because a few months ago, Anton Siluanov, the Russian Finance Minister, at the end of a BRICS Finance Minister’s meeting, Russia is the current rotating President of the BRICS, at the end of a finance – BRICS Finance Minister’s meeting, Anton Siluanov talked about creating some – what he called BRICS Bridge.
And so, it – you know, what you’ve got is the possibility of mBridge, which is currently sitting in a, sort of, you know, sort of, conventional framework in the BIS, it – you know, the one scenario at least, is that mBridge, sort of, migrates to a pure BRICS environment that would, you know, be, I think, the biggest thing that BRICS – I mean, the biggest thing I can imagine BRICS doing as a, kind of, you know, global policy initiative. And it’s conceivable because, as a – as – well, because the current members of mBridge, as I said, Saudi Arabia, Thailand, China and UAE, these are all either current members of BRICS or future members of BRICS. So, mBridge has a, kind of, BRICS flavour to it already, and so, that’s why it’s becoming possible, in my view, to imagine mBridge, sort of, migrating into a pure BRICS environment.
Mike Higgins
Just to – I’m just going to bring in a couple of questions that we had submitted earlier, which looks to another potentially big geopolitical event, the US Presidential Election and its outcome. The question was put, “What will happen to the dollar should Trump win a second term?” And I did read of remarks that Donald Trump had made around trying to use tariffs, as he saw it, to protect the dollar’s reserve currency status. So, there was some criticism of those comments, so I wonder if you could, sort of, reflect on that as a potential, kind of, moment that the dollar supremacy might look to wobble a little.
David Lubin
Donald Trump has expressed two views about policy, which are – which – you know, that have relevance for the dollar, that are completely contradictory. On the one hand, relying on tariffs. So, the common objective in all – among all of these comments that Trump has made is about his, kind of, obsession with the size of the US trade deficit, which – yeah. So – but the two tools that he’s referred to as a means of reducing the trade deficit are – have completely contradictory implications for the dollar.
On the one hand, he’s talked about, you know, raising tariffs. Raising tariffs, almost by definition, causes the dollar to strengthen, because if you raise tariffs – if you raise a 10% tariff against Country X, the natural, or one natural – I mean, I’m oversimplifying, but one natural result is that country X’s currency depreciates by 10% to offset the economics of the tariff. So, using tariffs causes the dollar to strengthen. On the other hand, Donald Trump, has talked about wanting to weaken the dollar, and his former Trade Representative and possible future member of his administration, Robert Lighthizer, has also talked about the idea of depreciating the dollar, or devaluing the dollar, again, as a way of reducing the trade deficit.
Now, I would say that, you know, it’s very difficult to imagine how the United States, by dint of policy, could weaken the dollar. I mean, it’s happened before. In 1985, there was the Plaza Accord, in which the United States, Japan, the United Kingdom, Germany, a number of others, got together at a time when there was a universal acknowledgement, or universal consensus, that the dollar was overvalued, that the dollar was too expensive, and that was causing, sort of, imbalances for the global economy. There was a co-ordinated intervention around 1985 in – as a result of the Plaza Accord, to, kind of, weaken the dollar. It’s very difficult to imagine that, kind of – you know, that degree of co-ordination in today’s international financial system, particularly since you’d need the co-operation of China to achieve such a thing, and I can’t imagine why China would want its currency to strengthen against the dollar.
And, you know, the other ways in which Trump might want to weaken the dollar, either to, kind of, talk it down or to intervene in the foreign exchange markets unilaterally, or to impose capital controls, I mean, these things would be terribly destructive to US international credibility. And so, I think although he’s spoken about wanting to weaken the dollar, or talk down the dollar, it’s going to be very, very difficult to do in practice. Because in practice, the only really reliable way of achieving that objective would be to recreate something like the Plaza Accord, and I don’t think that that’s a real object – a realistic objective in today’s geopolitical environment.
Mike Higgins
Just – we are running out of time, David. Thank you very much. I just – before we move to the final part of the discussion, I just – there was one – again, a question that came in earlier online was, “Do you think the Euro could ever become a credible challenger as a reserve currency, or rather, to the primary reserve currency status of the dollar?” How would the EU have to innovate institutions to allow that to become a possibility, if at all?
David Lubin
One of the 20th Century’s most famous Economists, Robert Mundell, had a great line, “Great powers have great currencies.” The Eurozone is not really a great power. You know, the sort of – there’s no political union in the Eurozone, there’s no fiscal union, and so, you’ve got a, kind of, combination of both, kind of, political and financial obstacles to the Euro becoming a really heavy hitting global currency. I mean, having said that, you know, it’s not a meaningless global currency. It accounts for around 20% of foreign exchange reserves, and that ratio has been fairly consistent over the last couple of decades.
But, you know, the first – yeah, the first problem is that, yeah, the Eurozone is not a political union, but also, there’s a more technical aspect to this, which has to do with the fact that unlike the United States, where companies tend to fund themselves by issuing securities, in the Eurozone, companies tend to fund themselves by borrowing from banks. And what that means, is that the size of global – the size of the Eurozone’s capital markets are much, much smaller than the size of US capital markets. And one of the things that preserves dollar dominance is the depth and size of US capital markets. I mean, if you add up the total stock of bonds and the total stock of equities in the United States, you get a number close to $50 trillion. The same number within the Eurozone is more like $20 trillion. And so, because the Eurozone’s capital markets are so relatively undeveloped, that, kind of, limits the growth of the Euro as an international currency.
Mike Higgins
Right. Thank you very much, indeed, David. We are coming towards the end of the event and thank you for those thoughts, and to everyone who’s put questions today. I apologise if I’ve not been able to get to yours, but to close today, we’re inviting you to take part in a poll, in response to the question that should be popping up on your screen now. That question is, “How many years do you think it will take before the dollar loses its place as the global reserve currency?” We’d be grateful if you could vote. You’ve got about 20/30 seconds, and once you’ve voted, we’ll get immediate results and we’ll put those – put your thoughts to David. I – while you’re voting, I should just reiterate that, as I said at the top, David has a couple of articles on this – on the Chatham House website, including one in The World Today, which you can find if you search for David Lubin at Chatham House.
So, I hope you are clicking away. Okay, right, the results are in. I have them in front of me, here. They are spread across all of the six options, but a third of you, the most, voted to say that it’ll be “50 plus years” before the dollar loses its place as a global reserve currency. And then 20% of you – 21% of you said “between 21 and 30 years.” And just 6% said this is going to happen “within the next decade.” So, David, 50 plus years before the dollar, the greenback, might be toppled. Do you agree?
David Lubin
Yeah, I mean, I do, I do. You know, I think, it’s going to be a long time coming. I mean, I don’t want to sound – particularly at the end of a nice chat, I don’t want to sound too pessimistic, but it is most likely that on the other side of World War Three, where the United States is on the losing side, that is the most likely scenario for dollar dominance to come rapidly to an end. I don’t want anybody to take that away as a forecast, but it’s that kind of thing. You know, the connection between geopolitical power and currency power is, in my view, by far the most important fact.
Mike Higgins
Right, and would – as a, sort of, takeaway from today’s discussion, would that be your, kind of, your final point?
David Lubin
Yeah, absolutely. Although, one final, final point, which is that, although as I’ve tried to argue, you know, dollar dominance is, kind of, here to stay for the foreseeable future, the only thing that is as strong as dominant – as dollar dominance is the endlessness of the discussion about how to end it and whether it will end. So, we’ll still have plenty to talk about.
Mike Higgins
Okay. Thank you very much, David. That’s all we have time for today, sadly. Thank you very much to David Lubin for his thoughts today, and thank you very much to you, the Chatham House members. You took the trouble to join us today and to create this discussion. We very much appreciate it. I – as I said, I do apologise if I didn’t get around to putting your question to David, but do keep an eye out on the Chatham House website for the next members’ question time. There will be another. Have a good week, everybody. Goodbye.