Gripes about the greenback are nothing new. A French finance minister sniped at the “exorbitant privilege” its hegemony conferred on the US nearly six decades ago. Geopolitical shifts present an opportunity to challenge the dollar’s dominance. Witness the Brics development bank’s drive to lend in local currencies. Its goal is to offer an alternative to the US-based financial order.
Discontent is understandable. Sanctions on Russia highlighted the risks of holding foreign reserves in dollar-denominated assets. Currency fluctuations, notably the dollar’s recent rise to a 20-year high, can cause real damage. A 10 per cent rise in the dollar cuts emerging economies’ output by 1.9 per cent after a year, says the IMF.
Principal reserve currencies have suffered before. The British pound declined after the first world war. A shift away from the dollar could weaken the currency, raise US interest rates and reduce demand for US Treasury securities. Some $7.4tn, or 31 per cent, of Treasuries were owned by foreign investors at the end of last year. The market’s insouciance about the US debt burden would quickly turn.