Dollar Hypocrisy

-By Kushal Garg & Kushagra Baranwal (SRCC)

Introduction

“When America sneezes, the World catches cold”, this exorbitant power is the outcome of the Dollar dominance. Today, central banks worldwide hold 59% of their foreign exchange reserves in dollars, about half of the international trade, global debt securities, and international loans are invoiced in dollars (1).Around 40% of the payments globally are transacted in dollars even when it's between two foreigners (2). As per the federal reserve, foreign countries hold $7.1 trillion worth of money in US treasury bonds (3) .

Let’s delve into how this exorbitant power came into existence. US joined the World War II after the war paced up. It supplied weapons and arms to its allies during the world war. Most countries paid the US in gold, making the US the largest gold reservoir. After the end of the world war, it became impossible for economies to use the gold standard as they depleted their reserves in war. 44 allied countries in the Bretton wood agreement signed the charter in 1944 and pegged their currencies to the dollar to act as a standard medium of exchange. In turn, the US agreed to redeem the US dollar for gold as and when demanded.

Dollar Today

The US economy is the largest in the world with GDP crossing $23 trillion. The USAtreasury bonds are considered to be a safe haven investment. As Milken Institute quotes “The simplest test of a safe haven remains this: if you had to put all your money in a single currency and leave it untouched for 25 years, can you think of a better choice than dollars? ”. One can guess the power of the dollar by this data statistics that since the Great Recession of 2008, the bonds issued in dollars by foreign firms have almost tripled (4). The strength of the US economy and the global institutions like World Bank and IMF working for the benefit of the US economy has resulted in dollar supremacy.

Various factors point to Dollar supremacy. First is the benefit of financial stability and a political system in the economy as seen and trusted by millions of investors all over the world. SecondisthecredibilityoftheUnitedStates.TheUShasneverdefaultedonitsdebtandalways has a good cash flow in the International Global Market. Finally the use of the dollar in International trade, as a medium of exchange and as a reserve currency by central banks all over the world. This dominance is now being challenged by other alternative major currencies emerging globally.

Who Can Out-Throne the US Dollar as the World's Dominant Currency?

Euro, Renminbi, and Yen are the biggest rivals of the USD challenging its dominance as the global currency. Euro is the official currency of 20 member countries in the Eurozone and is next to the only US in terms of foreign reserve currency. As per IMF, $2.4 trillion worth of foreign currency is held in euros compared to $7 trillion in US dollars. Chinese Renminbi also threatensthethroneand theno.1position oftheUS dollar.Notonly Chinais thesecond-largest economy in GDP with over $18 trillion next only to the US but also has the largest population in the world. With growing concerns over the Russia- Ukraine war, China is trying to replace the USD as the base currency in all the deals pertaining to the oil sector with the support of Russia. Even Indian Rupee is now being officially accepted as a legal tender in 18+ countries, Russiaand UKamong them.Withits newerstrongerforeign policyandsupportofmajorstrong economies, the Indian rupee is in the run too.

The Impact of the US Dollar's Dominance on the Global Economy:

Dollar dominance has contributed to a much bigger issue known as ‘Dollar trap’. Under this countries are forced to hold a large amount of reserve in form of dollars to trade in the International market, and have bargaining power and liquidity in their operations. To hold a such large amount of dollars the countries are forced to take loans from global institutions like the World Bank and IMF again strengthening the US dollar's dominance over globally with high-interest rates.

US Federal Reserve monetary and fiscal policy employed to stabilize the inflation in the economy can also have ripple effects destabilizing the global economy. If Fed decides to increasetheinterest rates tocontrolrisinginflation,itwouldresultinlossof capitalin emerging global economies, devaluating their currency, making it difficult to repay their debt and overall leading to a recession as being witnessed in small economies like Pakistan, Shri Lanka and many more.

Conclusion:

In conclusion, the dollar's dominance has created a complex web of economic interdependence that has both benefits and drawbacks. While the dollar's strength has provided a level of financial stability and credibility to the US economy, it has also contributed to a "Dollar trap" that forces countries to hold large amounts of dollars and take loans from global institutions. Moreover, the monetary and fiscal policies of the US Federal Reserve can have ripple effects on the global economy, causing recessions in smaller economies. As alternative major currencies like the Euro, Renminbi, and Yen emerge, it remains to be seen whether the US dollar will maintain its dominant position in the global economy or be displaced by a new global currency.

It is suggested that rather than giving the reign of control to a single country it will advisable that a centralized currency model should be adopted and Global institutions should create a forum to introduce a centralized currency that holds an independent status worldwide. Adopting this kind of model will reduce the risk of economic crashes and ensure that the selected currency model must hold some intrinsic value and cannot be manipulated by a single power. Its should be regulated by the free flow of market forces of Demand and Supply.

References

Amadeo, K. (2022, March 16). Why the US Dollar Is the Global Currency. The Balance. https://www.thebalancemoney.com/world-currency-3305931 Best,R.(2022,September24). HowtheU.S.DollarBecametheWorld'sReserveCurrency.Investopedia. https://www.investopedia.com/articles/forex-currencies/092316/how-us-dollar-became-worlds-reservecurrency.asp

Bertaut, C. (2021b, October 6). The International Role of the U.S. Dollar. https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-s-dollar20211006.html

Dollar Dominion. (n.d.). Milken Institute Review. https://www.milkenreview.org/articles/dollardominion https://advisor.visualcapitalist.com/visualized-what-factors-drive-the-u-s-dollar/ OILPRICEANDTHEU.S.DOLLAR:ASURVEYOFTHEEMPIRICALRELATIONSHIPESTIMATES AND ALTERNATIVE OIL-PRICING CURRENCIES on JSTOR. (n.d.). https://www.jstor.org/stable/24812748 https://www.youtube.com/watch?v=0M79m44Zq7A

How Countries Should Respond to the Strong Dollar. (2022, October 14). IMF. https://www.imf.org/en/Blogs/Articles/2022/10/14/how-countries-should-respond-to-the-strong-dollar Lu, M. (2021, August 6). How Dominant is the U.S. Dollar? Advisor Channel. https://advisor.visualcapitalist.com/how-dominant-is-the-us-dollar/ Neufeld,D.(2022,December15). Visualized:WhatFactorsDrivetheU.S.Dollar? AdvisorChannel.

Recent Appreciation in the U.S. Dollar Unlikely to Have Large Effect on Domestic Inflation.(2022, August 17). https://www.kansascityfed.org/research/economic-bulletin/recent-appreciation-in-the-usdollar-unlikely-to-have-large-effect-on-domestic-inflation/ TRT World. (2021, April 3). Who Is Challenging the US Dollar’s Dominance? YouTube.

US Inflation Calculator. (2023, March 28). Historical Inflation Rates: 1914-2023 | US Inflation Calculator.USInflationCalculator|EasilyCalculateHowtheBuyingPoweroftheU.S.DollarHas Changed From 1913 to 2023. Get Inflation Rates and U.S. Inflation News. https://www.usinflationcalculator.com/inflation/historical-inflation-rates/ When Did the U.S. Dollar Become a Worldwide Reserve Currency, and Why? (2023, February 1).

Worldcoin.https://worldcoin.org/articles/us-dollar-reserve-currency#toc-5

Will theAsian countries be able to shield their economies from the dominance of Dollar using Rupee as their weapon?

~Priyam Sur (IMT Nagpur)

This article discusses the possible reasons why the Indian rupee may become a global currency in the future, and discusses how this could affect the USD. The world's strongest currencies are the USD, Euro and Japanese yen. These three currencies are used in a majority of the world's currencytrades andhold alot ofvalueon aninternational scale. However, recent developments in global hydrocarbon trades and other international currency transactions have made some experts believe that the INR could be the next global currency. The augmenting of India’s exportsand therising globalacceptanceof INR as aninternational currency could help position the INR as a contender to become the next global currency. However, this will need considerable efforts and it is not something that can be achieved in the short term. To build moretransparencyand trust among majornations,Indianeeds to focus onincreasing its exports which will lead to more acceptability for its monetary currency. USD is also known as the world's reserve currency, meaning that it's accepted in almost all transactions related to international trade. This has been due to its trustworthy reputation amongst the merchants and its recognizability as a known fiat currency around the world. Despite such superior status however, many experts believe that with time, another currency may replace the USD as the world's reserve currency and there are strong reasons why this could happen.

De-dollarization is on

With more nations trying to de-dollarize the global commerce to prevent their fiat currencies from falling any further, INR is getting closer to become a global currency. The formation of 60 special rupee vostro accounts in 18 countries, including Russia and Sri Lanka, has been approved by the RBI in order to facilitate the international commerce of INR, which has drawn attention from a number of countries. According to records, the RBI had given the go-ahead to "domestic and foreign authorised dealing banks in 60 cases for opening SRVAs of banks from these nations" for the purpose of settling payments in INR, according to a statement made to parliament by India's Minister of State for Finance Bhagwat Karad. The minister said that, out of the 18 nations, Russia has been vociferous in promoting local currency transactions as part of the larger "de-dollarization" movement. He continued by saying that India, on the contrary, has been promoting the notion of commerce in local currency primarily to increase exports. These 18 nations include Russia, Singapore, Sri Lanka, UK, Botswana, Germany, Uganda, Guyana, Israel, Kenya, New Zealand, Oman, Malaysia, Mauritius, Myanmar, Seychelles, Tanzania, and Fiji.