Rumors of the dollar's demise look much exaggerated
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Illustration: Sarah Grillo/Axios
The Iran war may well be heightening countries' desire to diversify away from the U.S. dollar. But desire alone won't change the underpinnings of global commerce.
The big picture: There has been plenty of chatter about the breakdown of the petrodollar system under which Middle East oil exporters accumulate and redeploy dollars, and about the world's broader reliance on the dollar as a reserve currency. But there's not much evidence of an accelerating shift along those lines.
- Indeed, the war has coincided with a surge in the dollar's value on currency markets.
Between the lines: The U.S. relationship with many historic allies has become frayed over the last year. Geopolitical rivals, first and foremost China, have long wanted to knock the dollar down a peg.
- But the events of the last year haven't changed the underlying logic that underpins the dollar's role.
- There are powerful network effects in play — countries use dollars to trade because everybody else does. There's a huge financial infrastructure, built over decades, that a rival can't quickly replace.
- And the U.S. Treasury market is enormous and one that foreigners can readily access, meaning that those with dollars to save can easily do so.
Of note: There's a school of thought — with adherents on both the political left and the Trumpian right — that this is a bad thing for the country.
- America's role as provider of the global reserve currency is seen as resulting in a systemically overvalued dollar that disadvantages U.S. manufacturing.
- A former chief economist at the IMF argues against that view in a much-talked-about paper this week, saying that persistent U.S. trade and current account deficits are a result of home-grown imbalances.
What they're saying: The theory that global demand for dollars is the cause of U.S. current account deficits "fundamentally misconstrues how international financial markets work — harmfully so, because it deflects attention from the main major drivers of current account imbalances today," writes Maurice Obstfeld, a senior fellow at the Peterson Institute.
- "Those include the unsustainable U.S. federal budget outlook and China's failure to shift its economy further toward a non-deflationary, consumption-driven growth model, both of which would be easier to modify in the medium term than the dollar's global role," he adds.
- He argues that the widespread use of the dollar outside U.S. borders doesn't inherently require trade deficits. The U.S. can export dollars through financial flows, and dollar assets can essentially be created offshore, most notably via the eurodollar system, through which banks outside the U.S. are able to create dollar-denominated deposits and loans.
The bottom line: The dollar's role, Obstfeld writes, has resulted in "huge efficiencies in global trade and finance."
- "That role has also benefited the United States specifically, not least by giving America a powerful tool of economic statecraft."
