Dollar hegemony in danger

The history shows that the world’s base currency can lose its position, as happened with Britain’s pound in the 20th century. The US economy is much smaller as a share of world output now than it was after WWII, when its dominance began. And now some investors are flagging concerns about the potential for chaotic images emanating from the US election that could undermine confidence in American rule-of-law and the broader political system.

In 2009, after the meltdown in US mortgage securities triggered the biggest financial crisis since the Great Depression, China’s central bank chief of the time issued a high-profile call to move the global financial system away from the dollar. 

Fifteen years later, it continues to reign supreme — having weathered the launch of trade wars under Donald Trump’s administration and a welter of US sanctions on other countries that showcased the risk, for some nations anyway, of keeping assets in dollars. The greenback remains the main currency of choice in global reserves and massively dominates the foreign-exchange market.

Multiple stewards of US economic policy over decades have highlighted the importance of democratic, transparent governance and respect for the law in underpinning the dollar’s role. A violent attempt to disrupt the transfer of power occurred in the wake of the last election, and had little impact on markets. But further instances could have consequences, some warn.

“You can’t be complacent around any of these things” with regard to the dollar, Robin Vince, CEO of BNY Mellon — one of the world’s largest custodians of financial assets — said in an interview last week. “As is the case with many tipping points, you don’t quite know when you’re approaching it until you go over the other side.”

Thierry Wizman, a three-decade Wall Street veteran, said “the American exceptionalism narrative could end if traders lose faith in US institutions.”

“The way that could happen in the next few weeks is if we have an election without a definitive result for several weeks, and where people can’t trust the institutions to adjudicate any of these disputes,” said Wizman, a global currency and rates strategist at Macquarie.

Courtesy: Bloomberg