Global reserve currency proves to be a curse for the issuing country
On October 5, the Triffin International Foundation celebrated the 100th anniversary of the birth of Robert Triffin, a Belgian economist who worked at the US Federal Reserve then returned to Europe to help with European monetary integration.
He was, of course, famous for his Triffin dilemma, the theory that says conflicts will arise between the domestic needs of a global-reserve-currency country and the needs of the world that uses that reserve currency. Triffin predicted that the reserve-currency country would run a current-account deficit to provide the world with greater liquidity. Over the long term, the cumulative current-account deficits would turn into a large debt overhang.
Triffin wrote about the dilemma in the late 1960s, when the US was struggling over whether to maintain its peg to gold, which it abandoned in 1971. This removed the anchor of the Bretton Woods system of fixed exchange rates. The succeeding Bretton Woods II has become a system of flexible exchange rates plagued by financial crises every decade: Latin America in the 1980s; Mexico and East Asia in the 1990s; the US subprime collapse in 2007-09; and the European debt crisis today.
Today, there is sufficient awareness that the shift from a unipolar world to a multipolar global financial system carries with it great risks and unknowns. The unipolar world of dominance by the US dollar had a lot of advantages, as long as the United States remained the unchallenged hegemonic power. The US dollar became not only the standard unit of account for global trade, but also the deepest and most liquid market and an important store of value.
The price of oil, gold and other important commodities are all measured in US dollars. The US Treasuries market is the most liquid and efficient clearing system, which is one fundamental reason why the dollar remains superior to the euro, which does not have a single eurobond market.
According to data last year from the Bank for International Settlements, the US dollar still accounts for 85 per cent of global foreign exchange trading, compared with 39 per cent for the euro, 19 per cent for the yen and 13 per cent for sterling (because foreign exchange transactions are paired, total turnover adds up to 200 per cent). By contrast, the Hong Kong dollar accounts for only 2.4 per cent and the renminbi 0.3 per cent of turnover.
The US dollar still accounts for nearly two-thirds of total foreign exchange reserves. China alone reputedly holds roughly US$2trillion in US dollar assets in the foreign exchange reserves and holdings by Chinese banks and state-owned enterprises.