America's killer app: The dollar as the world's currency
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Planet Earth has roughly 180 currencies. But for a vast share of global transactions, people want to use just one: the United States dollar.
Why it matters: This is a unique source of global power and responsibility. America's role in the world in the decades to come will be determined by its ability to maintain, and wisely steward, this role at the center of the global economy.
- Yes, but: Other nations are increasingly chafing at the power the U.S. wields thanks to the dollar — and they're seeking alternatives.
How it works: The dominance of the dollar in international trade and finance gives the United States the ability to exert its will far from U.S. shores, without firing a gun.
- This power is evident when the U.S. fines European banks for doing business with Iran or cuts off Russian oil companies from the mainstream financial system.
- It has also fueled global demand for Treasury debt that allows the U.S. to borrow vast sums, especially in crises.
Zoom in: This primacy is based on an interlocking series of policy choices and structures built over decades — in some cases centuries.
- There's the eurodollar system, through which the U.S. government tolerates and even encourages global banks to create and circulate dollars outside the U.S. The Federal Reserve has backstopped that system in crises through swap lines with global central banks.
- The U.S. has the largest and deepest market for safe government bonds in the world and an "open capital account," meaning international investors can legally move money in and out of U.S. investments. For countries looking to maintain financial reserves on a massive scale, it's practically the only game in town.
- The U.S. has long been an outsized global importer and steward of the world's most powerful military, so for other countries, using dollars for trade has come with convenience and security.
State of play: "If you could only put all your money in one country, which would it be?" asked JPMorgan CEO Jamie Dimon last month at the Reagan National Economic Forum. "Well, there's only one that's protected by the Atlantic and the Pacific, the United States military, the rule of law."
Threat level: Some of the underpinnings of U.S. dollar dominance are coming under question.
- Sky-high U.S. fiscal deficits mean the world is being inundated with Treasury debt, the political independence of the Federal Reserve is under question, and many in the Trump administration see the costs of maintaining dollar dominance as a burden for Americans.
- Perhaps most importantly, the U.S. has used the threat of cutting off access to the dollar-based global financial system as an increasingly all-purpose weapon for economic warfare. That means major U.S. rivals (China, Russia) and frenemies (India, Brazil) are eager for dollar alternatives.
Reality check: So far, other leading powers seem to lack the willingness or ability to build alternatives.
- European nations have been unable to develop a unified sovereign debt market of the sort that has existed in the U.S. for two centuries.
- The Chinese are reluctant to open their capital account, with the loss of control that would come with the free flow of capital into and out of the nation.
- China has explored swap lines with central banks to encourage use of the renminbi abroad, but other countries see those as coming with even more geopolitical strings attached than the dollar does.
- It's doubly hard to imagine the Chinese making peace with other nations' banks consistently supplying the world with Chinese currency, as happens with eurodollars.
More broadly, network effects are powerful things. Everybody uses dollars because everybody else uses dollars.
What they're saying: "I don't see anything that could replace the dollar system," Brendan Greeley, author of "The Almighty Dollar: 500 Years of the World's Most Powerful Money," a new history of the greenback, tells Axios.
- "I think the dollar could outlive the United States, and I'm not in any way predicting the end of the United States."
The bottom line: The role of the U.S. dollar in the world is secure for now, much as America's rivals might not like the status quo. But global angst is simmering, and as the Dutch and British learned long ago, no dominant currency is forever.
This story is part of an Axios Deep Dive on the policy debates shaping America's future. Read more in the series:
AI oversight gap could leave a lasting legacy
The power decisions that could shape the next century
The fight over America's vaccine future
