Despite Marketplace Noise, the Dollar Isn't Going Anywhere

All over the news recently, there's talk of countries seeking alternatives to the Dollar, eyeing other means than the American currency for trade and reserves.

Some analysts, perhaps too hastily, are jumping to the conclusion that the Dollar is about to crash and burn, taking capitalism with it.

But really?

Not by a long shot.

Despite the noise, the Dollar isn't going anywhere.

The issue has gained more attention due to Russia's response to sanctions, disconnecting Vladimir Putin's regime from various Dollar-based networks, and emerging countries like Brazil, India, and Saudi Arabia making superficial attempts to shift away from relying heavily on the Dollar for global transactions.

Despite these marginal movements, the Dollar still commands 88% of international transactions and 60% of reserves, with the Renminbi a distant 3%.

But we cannot ignore the debates about whether the Dollar's supremacy is sustainable and whether it even benefits the U.S. economy, given that a strong Dollar has allegedly hurt US exports for over a decade now.

Yet, the Dollar's dominance is good news for Americans and pretty much everyone else globally. And it's not just because there are no viable alternatives, or the headaches and costs of de-dollarization might be too harsh to bear.

The Dollar is king because it's a public good not only for America or the global economy but for freedom.

The kind of trust America commands — with its economy, institutions, and military muscle — underpins rules-based international free trade. You can't just pull that out of a hat. Neither China, Russia, the European Union (EU), nor an ad hoc pool of countries that don't even trust each other (like the BRICS) can challenge this. That doesn't mean the Dollar can't lose some shine, but only to a limited extent.

The Dollar's strength mirrors America's economic might, the depth and openness of its markets, the liquidity and convertibility of its currency, and the rule of law within its, ahem, borders.

U.S. policy might waver, but it holds steadier than others. Globally, U.S. banks dominate, and the financial world leans on the Dollar by habit and inertia.

As long as the U.S. doesn't shoot itself in the foot way too many times — misusing sanctions, running bad macro policy, and tinkering with defaulting on its debt — the Dollar's crown is safe.

The systemic role of the dollar is a net benefit to the U.S., cutting costs, bringing in revenue, and acting as a natural hedge against currency risks.

The Dollar stands tall, key in the world's money flow, valued by many.

Yet, talk of moving away from it has seen an upsurge. One way to think about this is as an offshoot of the G7 countries' concerns about supply chain security and resilience, stemming from China's rise in manufacturing and Russia’s invasion of Ukraine.

Think of the Dollar as the U.S.'s biggest export.

After all, a sound and stable Dollar that can be efficiently used for international payments and reserves is a good the US government produces.

When the U.S. runs trade deficits, it means that the US is exporting dollars, almost in reverse of how China keeps the Yuan undervalued to boost its exports of goods.

Another aspect to consider is the important distinction between forced de-dollarization and voluntary de-dollarization.

Russia, cornered by sanctions, turned to the Renminbi for its dealings with China — a move of necessity, not choice.

That's a very different scenario from the doomsayers' predictions of a voluntary mass exodus from the Dollar.

Which begs the question: what's in it for anyone to ditch the Dollar, aside from slipping through the sanctions' noose?

The Renminbi's rise in global trade is minor, especially when the effects of forced de-dollarization are excluded.

Even Russia's currency shift might be seen more as a move away from the Euro than the Dollar, given that most of the trade Russia diverted to China was previously denominated in Euros, not Dollars.

"De-dollarization" itself is a slippery term.

It could mean the Dollar getting edged out of its status as the world's reserve currency, or it could mean that fewer transactions are settled in Dollars and more in other currencies, like the Renminbi or the Euro.

No currency challenges the Dollar as a reserve.

The American capital markets have unrivaled depth, the legal framework is clear and tested, and you can use the Dollar to buy almost anything anywhere, anytime.

Try that with another currency, and you'll feel the weight of transaction costs in your wallet and settlement time on your watch.

The prevalence of the Dollar as a payment method means risks to the usual suspects.

Yet, change is hard.

The world talks of diversifying away from relying so heavily on Chinese manufacturing for years now, but it hasn't moved much.

Thinking about dumping the Dollar for something else?

That's a much steeper mountain to climb.

Talk and action are worlds apart, and symbolic gestures do little to close the gap.

You are free to suspect that, when it comes to de-dollarization, a lot of the talk will never make it to the promised land upon the hill.

Cauf Skiviers writes about philosophy, economics, politics, and things that lie between the inconceivable and the undesirable. His reports also appear at: https://cauf.substack.com. Read more of Cauf Skiviers' reports here.