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Wednesday, October 24, 2018

The Dollar and its Discontents

A thank you to a reader for pointing me to this article by Barry Eichengreen on the Project Syndicate web site. The article is another in a long line that ponders whether or not nations can find sustainable ways to get around using the US dollar. This is a hot topic these days and a lot of people are watching to see how things play out. Below are a couple of excerpts from the article and then a few added comments.

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Having unilaterally reimposed sanctions on Iran, US President Donald Trump's administration is threatening to penalize companies doing business with the Islamic Republic by denying them access to US banks. But that could hasten the dollar's demise as the main global currency.

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"If the geopolitical shock of Trump’s unilateralism spurs an institutional innovation that makes it easier for European banks and companies to make payments in euros, then the transformation could be swift (as it were). If Iran receives euros rather than dollars for its oil exports, it will use those euros to pay for merchandise imports. With companies elsewhere earning euros rather than dollars, there will be less reason for central banks to hold dollars in order to intervene in the foreign exchange market and stabilize the local currency against the greenback. At this point, there would be no going back.

One motivation for establishing the euro was to free Europe from excessive dependence on the dollar. This is likewise one of China’s motivations for seeking to internationalize the renminbi. So far, the success of both efforts has been mixed, at best. In threatening to punish Europe and China, Trump is, ironically, helping them to achieve their goals."



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My added comments: Thus far, while there have been endless articles about how one thing or another will lead to the demise of the US dollar as global reserve currency, that has not happened. Until it does happen, there is no reason to suggest we are on the cusp of major monetary system reform.

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