For more than a half-century, the US dollar has been not only America’s currency, but the world’s as well. It has been the dominant unit used in cross-border transactions and the principal asset held as reserves by central banks and governments.
But, already before the recent debt-ceiling imbroglio, the dollar had begun to lose its luster. Its share in the identified foreign-exchange reserves of central banks, for example, had fallen to just over 60%, from 70% a decade ago.
The explanation is simple: the United States no longer dominates the world economy to the extent that it did in the past. It makes sense that the international monetary system should follow the global economy in becoming more multipolar. Just as the US now has to share the world stage with other economies, the dollar will have to make room for other international currencies.
What’s different now is that a pox has been cast on both houses. The US debt-ceiling fiasco has raised doubts in the minds of central bankers about the advisability of holding dollars, while Europe’s failure to resolve its sovereign-debt crisis continues to fuel doubt that the euro can survive. Once upon a time (less than a year ago), it was possible to imagine international-reserve portfolios dominated by the dollar and euro; today, anxious central bankers are desperate for alternatives to both sick currencies.
Barry Eichengreen in Project Syndicate. Here
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