Posted by Michael Samson– iBanFirst, Regional Director for Italy –
Emmanuel Macron’s latest claim to European strategic autonomy collides with a harsh reality: the supremacy of the US dollar. Is some kind of de-dollarization possible then? iBanFirst has collected some of the reasons why this scenario is very unlikely.
The first reason is the most obvious: most global debt is denominated in US dollars and to pay it off you need access to US dollars. This applies to all major economic powers, even China, whose first loans from the Belt and Road Initiative were issued in dollars. Secondly, military dominance and monetary power are closely related. The stronger a country’s military ties with the United States, the more dependent that country is on the US dollar.
The dollar is intertwined with US military power
A Federal Reserve study showed that three-quarters of the world’s dollar reserves are held by countries that have strong military ties with the United States. Even if the dollar is used less in world trade, which is a very unlikely scenario, this does not necessarily mean that it will lose its position as a major international store of value, precisely because of US military dominance.
Why is the dollar still ahead of the yuan?
Third, there are many structural factors that support an international monetary system that focuses on the dollar (instead of the yuan):
1. The dollar is very liquid, the yuan is not
2. The yuan is pegged to the dollar
3. The United States remains the most powerful country in the world, militarily and economically
4. The United States is also the largest oil producer in the world
What will happen to the dollar in 10 years?
It is likely that we are moving towards a more decentralized global monetary system, in which the US dollar will continue to be the primary reserve currency along with several other competitors, such as the yuan. This is a healthy and normal development for the global economy, but especially so for the US economy. The fact that all countries depend on only one country’s currency is not good. It creates imbalances for them and for the United States alike.
However, there is one last point that could reverse the trend of a strong dollar. We know that dollar dominance increases US import power and reduces export competitiveness. It expands the country’s soft power at the cost of deteriorating domestic industrial capacity. Simply put, global diversification of central bank reserves and payment circuits is bad for the United States as an empire, but not for the United States as a country.
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