In a recent article published in Project Syndicate, a senior fellow at the Atlantic Council challenges the notion that geopolitical fragmentation will automatically lead to the breakdown of dollar dominance. While de-dollarization efforts are gaining traction in countries like Russia and China, Carla Norrlöf emphasizes that the fate of the greenback will primarily be determined by economic dynamics rather than international relations. This article delves into the complex interplay between geopolitics, reserve currencies, and the factors influencing the global standing of the US dollar.
The Economics of Dollar Dominance:
Norrlöf argues against assuming that a more divided world will naturally result in a more multipolar currency landscape, especially when it comes to reserve currencies. She asserts that the significance of the dollar will continue to be upheld by economic factors.
Despite concerns over US sanctions, which have motivated some central banks to seek alternatives to the dollar, Norrlöf highlights that the conditions that prompted these sanctions can also drive countries towards diversifying into dollars. Economic relations with security implications play a significant role, causing countries under the US security umbrella to remain tied to the dollar even if they oppose Western sanctions.
The Challenge of Alternative Currencies:
While there has been a rise in the international use of alternative currencies, such as the Chinese yuan, Norrlöf suggests that they still have a long way to go before posing a substantial challenge to the dollar.
She acknowledges the expansion of the yuan’s international footprint through trade agreements and bilateral swap lines, but emphasizes that China’s control over the currency remains a limiting factor.
Other currencies like the rupee, ruble, and dirham have also seen increased transactions, but they still represent a small fraction of global trade. Norrlöf argues that trading in another currency does not necessarily diminish the dollar’s international role, as the greenback’s presence in transactions may persist.
The Uncertain Path Ahead:
Norrlöf highlights the lack of consensus regarding the potential outcomes if the dollar were to lose its unipolar hold on trade. Analysts’ perspectives on multipolarity vary, with some envisioning equal power shared among multiple currencies, while others argue against such symmetry.
This lack of clarity not only hampers constructive debate but also suggests that a significant shift away from the dollar is unlikely. The author further underscores that the ongoing pandemic and recent geopolitical developments do not provide sufficient grounds for confident predictions of the dollar’s demise.
The greenback’s centrality is primarily determined by economic factors and reinforced by the advantages of incumbency and network effects.
The future of dollar dominance remains a complex and nuanced subject, influenced by both geopolitical factors and economic dynamics. While geopolitical fragmentation may raise concerns about the dollar’s global standing, Carla Norrlöf’s analysis suggests that economic factors will play a decisive role.
Despite the rise of alternative currencies and concerns over US sanctions, the dollar’s incumbency advantage, economic centrality, and network effects provide resilience. As the global landscape continues to evolve, it is clear that any potential transformation in the dominance of the US dollar will be shaped by intricate interplays between geopolitical shifts and economic realities.