Why is the dollar still the currency of the world?

LONDON – A mere superficial badessment might conclude that the United States is not at all the ideal candidate for a job to be administered at the most representative of the currency of the planet.

It has a huge public debt – $ 22 trillion – and it is increasing. As for its policy, it has recently caused the partial closure of the longest running administration in the country's history. Its banking system exceeded, just ten years ago, the worst financial crisis since the Great Depression. Its proud nationalist president is raising concern among his people about foreigners because he ignores the norms of international relations, hence rumors that the US dollar has already lost its aura of refuge. ultimate.

However, the money tells a totally different story. In recent years, the dollar has strengthened its position as the preferred custodian of global savings, the ultimate refuge in times of crisis and the main means of trading commodities such as oil.

The sustained strength of the dollar maintains the way of reporting US President Donald Trump. Thanks to the strength of the dollar, the Treasury has been able to find buyers of government savings bonds at affordable and enviable prices. It has also strengthened the authority of Trump, who has managed to impose his foreign policy on a reluctant world in general, thanks to the dollar that amplifies the power of its trade sanctions, particularly against Iran and Venezuela .

As banks can not compromise their access to the bowels of the dollar-based global financial network, they have done everything to stay away from nations and corporations that Washington calls undesirable.

"There is no alternative to the dollar," said Mark Blyth, an international political economist at Brown University. "We can not live without the dollar and this gives the United States an impressive structural power."

This is the reality despite the fact that many had predicted, after the financial crisis, that the dollar would eventually lose some of its dominance and that, in an era of outstanding American character, it was time for the currency to change. another country has a chance.

China has tried to make its currency, the renminbi, more important to reflect its position as a world power. For the past ten years, it has entered into foreign exchange agreements with many countries, including Canada, the United Kingdom and Brazil. President Xi Jinping promoted China 's global infrastructure package of one billion dollars, known as the Belt Road Initiative and Silk Road, partly as a way to expand the use of renminbi in the world. Last year, China set up a trading system in Shanghai allowing it to buy oil in Chinese currency.

Unfortunately, the current economic slowdown in China, the concerns that have generated increasing debt and the discomfort of their neighbors over the possibility that their investments are actually a new form of colonialism have combined to moderate their projects in the telecommunications sector. . l & # 39; infrastructure

The restrictions imposed by the Chinese government on the country 's cash outflow and the alarming arrests of foreigners have put the attractiveness of preserving money at the door. the image of President Mao.

"And China?" Asked Blyth, rushing to list possible alternatives to the dollar. "I could go to this country and simply disappear, it's a situation that does not inspire confidence.As soon as a country applies this type of policy, it shows that it can not be a serious candidate for a world currency. "

The best opponent of the dollar is the euro for a long time.

The problem is that German sovereign bonds – the most reliable type of investment in euros – are terribly rare. Germany has a deep cultural aversion to debt and is reluctant to finance its spending by selling bonds. As a result, investors seeking ultra-secure shelters to save have very few options in euros. In comparison, the stock of US savings bonds is almost unlimited.

A series of crises in the nineteen countries sharing the euro has provoked more hostility than unity and revealed a fundamental flaw: the euro is a common currency that does not exist. 39, does not support a common political structure firm response in case of difficulties.

"The problems of the euro concern governance," said Catherine Schenk, historian of economics at the University of Oxford. "There have been deep failures since the beginning, it does not seem to be a very safe haven to replace the US dollar."

In contrast, the dollar looks like a unique creature of its kind in the global landscape because it does not suffer from any existential fear.

In recent years, the Federal Reserve has raised interest rates, which has made the dollar more attractive to investors because the rates of return on investment in dollars have also increased. The tide brought more money to US shores.

The undeniable permanence of the dollar, although it seems incomprehensible, was consolidated during the global crisis that erupted in 2008.

He faced the frightening possibility that global banks could not raise enough dollars to avoid an adjustment of accounts with debts denominated in that currency. The Federal Reserve (which in essence is the world's central bank) has opened an inexhaustible source of dollars. The system has survived.

According to the International Monetary Fund (IMF), between the beginning of 2008 and the end of 2018, the share of dollar reserves of central banks in the world remained almost constant, rising from only 63% to 62% of the total. Thus, it has behaved with everything and that the total reserves (the currency that the central banks keep in their balance sheet) have been increased by more than half.

Overall amount of currencies in central banks

Overall amount of currencies in central banks

At the same time, the reserves entrusted to the euro went from 27 to 20%. Much of this movement reflects the loss of value of the euro against the dollar. The renminbi accounts for only 2% of total reserves, according to the IMF.

"Even though Trump is in the White House and has done everything to undermine US leadership in the world, the dollar has managed to remain the dominant currency and is showing no signs of falling," he said. Nicola Casarini, researcher at the Institute of International Affairs in Rome.

Nothing is forever in the world economy and this time is not more permanent than others. However, for now, the dollar is, as it has been for a long time, the closest thing to certainty in an unstable global economy.