ForumIAS announcing GS Foundation Program for UPSC CSE 2025-26 from 10th August. Click Here for more information.
Contents
Context: Western powers have slapped sanctions on Russia. These sanctions sting because of the US dollar’s dominance across the global economy and finance.
How important is dollar in present global trade?
More than half the global trade is invoiced in dollars and nearly two-thirds of the foreign exchange reserves and global debt are held in dollars.
Exchange rates between pairs of currencies are set via their parity with the dollar. The sentiment on Wall Street and the decisions of the US Federal Reserve affect markets and economies around the world.
What are the other factors against the dollar dominated economy?
The Global Financial Crisis in 2008 reinforced the bitterness against the dominance of the dollar in global finance and galvanized the search for an alternate reserve currency. The campaign lost its momentum later.
Chinese renminbi as an alternative
This has been a prospect after China started dominating global trade. It became more noticeable after the IMF included the renminbi in the SDR basket of currencies in 2016.
Many experts doubts the capabilities of renminbi in challenging the dollar. The renminbi’s exchange rate is not market determined, China imposes controls on capital flows in and out of its economy. Its financial regulation standards are not transparent and predictable. China is also an authoritarian regime with a dubious reputation for transparency and rule of law.
What does the future hold?
The sanctions could encourage the emergence of small currency blocs based on trade between separate groups of countries. It is also possible that cryptocurrencies will start displacing dollar as a medium of exchange.
But as a safe haven asset, the dollar remains unrivaled no matter the geopolitics.
Source: This post is created based on the article “Back the greenback: Grumblings about dollar dominance aren’t new” published in 5th April 2022 in Times of India.
