Macroscope | Why the party isn’t over for the US dollar just yet
- Amid another wave of dollar hatred, BRICS nations are talking up a common currency, while the yuan’s share of global trade finance has tripled in recent years
- Yet, ‘King Dollar’ plays a unique role in the global economy and also has luck on its side
Every so often, de-dollarisation emerges as a popular narrative in financial markets. In the years leading up to the 2008 financial crash, the dollar index – a gauge of the US currency’s performance against its main peers – was dropping fast, partly because of optimism around emerging markets but also because of concerns about America’s widening current account deficit. This precipitated what Jens Nordvig, founder of macroeconomic research firm Exante Data, calls a wave of “dollar hatred”.
While the greenback eventually stabilised – largely because of its status as a safe haven that benefits from periods of turmoil – a resurgence of dollar hostility took hold in 2009-10 when many developing economies blamed the Federal Reserve’s ultra-loose monetary policies for drawing too much capital towards higher-yielding emerging markets. This caused developing nations’ currencies to appreciate rapidly, fuelling talk of “currency wars”.
Fears and resentment of the dominance of the dollar, coupled with the US government’s own admission that Western sanctions could undermine the greenback’s hegemony, have increased the appeal of alternatives to dollar-denominated financing and trade.
Last week, foreign ministers of the BRICS group of countries asked the New Development Bank – the Shanghai-based lender launched in 2015 as a counterweight to Western multilateral institutions – to provide guidance on how a potential new common currency might work.