Is the hegemony of the dollar in danger? A multipolar monetary system is likely.”
The website the monetary tightening policy pursued by the Federal Reserve (Fed) to control inflation has effects beyond price stability, and one of them is the dollar strengthCredit Suisse analysts warn that they “can be more devastating” for the rest of the world than a weak currency, and envision a scenario in which the strong dollar “can be more devastating” for the rest of the world than a weak currency. weak currency, and they envision a scenario in which the global monetary system is moving towards a more multilateral approach..
The Swiss bank sees parallels between the current situation in the United States and what happened from the 1970s, when “.confidence in the US dollar was badly shaken.“. In the years following the abandonment of the gold standard, the country also faced monetary tightening which caused significant damage to many emerging markets, which had borrowed in dollars.
In attempting to assess the future role of the U.S. dollar in the global monetary system, one must pay great attention to the potential macroeconomic instabilities in the United States. and warns of “extreme volatility and an unusually high level of price level uncertaintywhich has resulted in high interest rate and currency volatility”.
The Fed is not moving from its objective of bringing inflation back to the 2% target, for which it has already argued that it will will continue to raise interest rates for at least some time.This will make the US dollar even stronger against other currencies.
“In sum, if the macroeconomic imbalances in the United States are indeed large, it remains to be seen to what extent this can undermine confidence in the reserve currency.. Analysts will be watching the markets for signs that confidence in the US dollar is eroding.“, they say.
One of the aspects that best reflects the hegemony of the dollar is its weight in international foreign exchange reservesAlthough the floating exchange rates, improved macroeconomic policies and the availability of swap lines. central banks reduce the need for such reserves”. At the same time, “the main central banks are diversifying away from the US dollar, perhaps to limit the risk of sanctions”.
SEEKERS TO THE THRONE
If the dollar ends up losing its presence in international relations, other currencies will try to occupy its throne, and China is one of the countries that could try to promote its currency, the renminbi.as it has already been at the forefront of efforts to develop an alternative international payment system, as well as arrangements to improve the mutual supportiveness of central banks in emerging markets.
However, Credit Suisse believes that the Asian giant “cannot or will not establish its own currency as a serious rival to the US dollar”.and there are also no other candidates for this role so far”, which “does not mean that the position of the American dollar will remain unchanged and unchallenged”, and they point out that “a The trend towards a more multipolar model of the monetary system is, in fact, already visible…”.“.
“For the foreseeable future, it seems unlikely that China will fully liberalize and open up its financial markets. for cross-border transactions. This is the main reason why the renminbi’s share in global foreign exchange reserves remains very low,” they say.
Nor do they see the euro capable of supplanting the dollar, despite the fact that it accounts for about 20% of the world’s international reserves. “and it is also freely tradable across borders, an essential prerequisite for a top currency.”
” The Eurozone policymakers are clearly not trying to ensure that their currency can play such a role.. The European Central Bank (ECB) focuses almost exclusively on the national economy. Furthermore, the Eurozone is (at least so far) still far from being a full-fledged fiscal union and therefore does not have a security asset for the whole territory like US Treasury bonds” , they say.
The absence of such an element means that “there is no very liquid and homogeneous asset that the rest of the world could hold as reserves”.“This comes on top of other obstacles, such as the lack of an integrated capital market and the lack of a banking union.
CAN A GLOBAL CURRENCY EMERGE?
The creation of a world currency may seem utopian to many, although this possibility has been advocated by internationally renowned economists, from John Maynard Keynes Nobel laureate Robert Mundell.
One of the assets that may bear the greatest similarities to a global currency is the Special Drawing Rights (SDR)which are used within the International Monetary Fund (IMF), although their volume is determined by the amount of capital contributed by the various countries to the IMF.
Credit Suisse points out that “ the IMF does not have the power to create additional SDRs out of thin air, as would be necessary in the case of an effective world central bank“So it should come as no surprise that the proposals to create a global currency have not succeeded and, in the current geopolitical context, this is even less likely”.
“Deliver the the power to print money from its own central bank to a supranational authority requires enormous mutual trust between countries. Such a transfer is only possible if a political union is formed,” they say.
Nevertheless, these analysts are in favor of the ” a more multipolar system ” due to increase in bilateral agreements in trade between many countries, allowing for returns to scale in the use of their respective currencies instead of the US dollar” and “the deepening of local capital markets in emerging markets”.