End of dollar hegemony: what are the risks and opportunities?

The historical hegemony of the US dollar

The hegemony of the dollar is such that we often forget that it is (relatively) recent. Until the Second World War, it was rather the British pound (GBP) which was dominant. In addition, other currencies have historically had periods of marked influence – including the French franc in the 19th century. But the Bretton Woods agreements held in 1944, at the end of the world conflict, drastically changed the situation.

The global monetary system is then organized around the US dollar, and the trend will last. Until our time, the hegemony of the American dollar has never been questioned, and it has been strengthened as various countries have adopted the mottoconsidered more stable than their native currency.

But would this simply be a sign of geopolitical stability, rather than the intrinsic virtues of the dollar? Yes, according to a Banque de France report published in the summer of 2022. It argues that previous centuries have seen a greater diversity of dominant currencies… But also more conflicts:

“A greater concentration of monetary dominance is indeed negatively correlated with the prevalence of financial crises over two centuries.»

What this also means is that the questioning of the status of the American dollar would therefore be linked to political and financial crises, or at least more instability.

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An influence that has begun to dissipate

Indeed, although the status of the king dollar has already begun to be questioned, everything has accelerated since the start of the war in Ukraine. The international sanctions that weigh on Russia – and which have been carried particularly strongly by the United States – have had a triggering effect. The medium and large economies of the world have apparently become aware of the need to build systems that cannot be reached by the United States. That is to say existing outside the SWIFT system in particular. And of course this also means reducing the use of the dollar.

Already, several regions of the world have declared their intention to detach themselves from the dollar. Starting with the colossal Chinese economy, which has taken a bit of a lead. Beijing is betting big on its central bank digital currency (MNBC), and on a reduction in the influence of the dollar. The formerly emerging countries, which weigh more and more on the world economy, have also met to discuss specifically the means of moving away from the American currency.

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A “multipolar” world?

There is indeed more and more talk of the “BRICS”, that is to say a group of countries whose economy is now sufficiently developed to act as a counterpoint to that of the United States. The group brings together Brazil, Russia, India, China and South Africa. As early as 2019, they had considered developing a common currency.

As we have seen, Russia has a particular interest in detaching itself from the dollar, because it is subject to heavy international sanctions. It is also associated with Venezuela, in order to find alternatives to the SWIFT system. On this subject, the president of this Latin American country recently affirmed that the gradual abandonment of the dollar was now “inevitable”.

For their part, the countries of Southeast Asia affirmed a similar desire last April. They explained that they wanted to move away from both the dollar and the euro, in order not to run the risk of being punished economically, but also to improve the resilience of their economies. And in Africa too, solutions are emerging. In Zimbabwe, a new gold-backed digital currency is also specifically aimed at reducing reliance on US dollars.

From week to week, statements by leaders and high-ranking officials in these countries are increasing to get the message across: the world will gradually “de-dollarize” . And that of course raises concerns on the Western side.

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A welcome redistribution or a risk for the global economy?

Global central banks showed signs of nervousness regarding the status of the USD. At the beginning of the year, six of them launched a coordinated action to support the dollar. Moreover, several economists and other Western commentators have in recent months warned of the dangers of a reduction in the influence of the United States currency.

This is the case of the Nobel Prize in Economics Paul Krugman, who recently warned of the “de-dollarization” of the world. He believes that the problem is that the world has organized itself around a dominant currency – dollar or otherwise. Reduce the use of the latter could therefore create significant liquidity blockages:

“The risk from a debt default point of view is not that another currency takes the key place that is currently occupied by financial securities settled in dollars. The risk is that no currency will be available to take its place, and therefore financial markets may be disrupted by the lack of access to a secure and liquid asset.»

An analysis shared by the American Institute for Economic Research, which asserted in a recent publication that it is not a simple replacement:

“Simply replace the fiat currency of the world’s largest economy with the fiat currency(ies) of smaller economies is not a viable strategy.»

The report also notes that the dollar is not the official but de facto common currency in various countries, including El Salvador, Panama and Zimbabwe. Moreover, 22 global central banks have pegged their currencies to the dollar. A reduction in the importance of this currency could therefore also destabilize these countries, by extension.

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For other regions, an opportunity rather than a risk?

These analyses, often Western, are however counterbalanced by the attitudes of the countries which wish to detach themselves from the dollar, and who see this as a real opportunity to reshuffle the cards. Because it must be remembered that in fact, the dollar had to be manually supported by the central banks: the destabilization therefore already exists. A system that is based on trust – this is the case for all currencies – cannot survive strong challenges.

It is then possible to consider the positive effects of this “de-dollarization “. On the one hand, it decentralizes global economic and financial power. The American centralization indeed gives a consequent weight to the American government on the other world governments. It is therefore a global issue that goes beyond finance, and which would make it possible to reduce the status of “world policeman” of the United States.

On the other hand, de-dollarization may leave room for new financial systems … Including those based on innovative technologies, including cryptocurrencies. At a time when the majority of central banks have chosen the blockchain to create their digital currencies (MNBC), we see that the change is as much ideological as technological.

Proponents of de-dollarization therefore see it as an advantage for redistributing financial power, and also questioning the preponderant place occupied by banks. Will this benefit cryptocurrencies? It is still too early to know, but these are obviously the exit doors envisaged by a growing number of people.

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Sources: Banque de France, Paul Krugman via TwitterAmerican Institute for Economic Research

Journalist at Cryptoast, I fell into the pot of cryptocurrencies a few years ago. I am passionate about the innovative technologies that stem from the blockchain and I like to find the most crispy information to share with you.

Marine Debelloir

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