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The Changing Role of the US Dollar in the Global Monetary System of a Multipolar World
Abstract
This research aims to identify possible global monetary system development scenarios in the context of the current United States dollar supremacy.
The primary method used is foresight analysis, which is based on a combination of deductive and historical data and trend analyses. The paper outlines the main drivers of potential change and uses them as inputs for scenario analysis. The three considered scenarios are a continuation of the absolute dollar dominance, reduction of the dollar’s power and split of the world economy between multiple currencies, and the emergence of a new single prevalent currency.
The main conclusion is that the second multipolar scenario resembles the current dynamics the most and is considered the baseline. However, the answer depends on the forecasting horizon as the scenarios have a certain sequencing. The dollar will probably maintain its supremacy in the short term. Its decline in the mid-term will give rise to a multipolar world, which can then, theoretically, lead to the emergence of a new dominant currency in the long term.
The results might be used as a framework for further structured analysis of possible outcomes in this domain.
... With its notable 45% market share, Bitcoin is a critical player in the digital currency landscape, contributing to the cumulative market capitalization exceeding 3% of the global market. Beyond these statistics, the influence extends into the realms of decentralized finance (DeFi) and non-fungible tokens (NFTs), constituting nearly 20% of total global financial transactions (Ilyinsky & Magamedov, 2023). ...
This research investigates the dynamic interplay between digital currencies and monetary policy in Indonesia, offering a comprehensive analysis of historical development and the current regulatory framework. The study synthesizes key findings through an extensive literature review, highlighting common themes and diverse perspectives within the rapidly evolving field of digital currencies. Practical implications for Indonesia's economic landscape and monetary policy are discussed, emphasizing the crucial need for adaptive regulatory frameworks that balance innovation and financial stability. The research identifies challenges and opportunities associated with the adoption and regulation of digital currencies, with a specific focus on leveraging these assets for financial inclusion and positioning Indonesia as a critical player in the global fintech landscape. Additionally, the study advocates for future research to explore nuanced socio-economic impacts, environmental considerations, and other areas requiring further investigation. In conclusion, this research underscores the importance of comprehending the evolving dynamics of digital currencies, providing a foundation for well-informed decision-making in Indonesia's monetary policy realm.
... CBDCs are entering the global arena and will likely shape the next evolution of money [10]. The role of the US dollar in the global financial system is analyzed in detail by Carol Bertaut et al. in the study titled "The International Role of U. S. Dollar" [11][12]. ...
The global financial system emerged in the aftermath of World War II, playing a crucial role in the global economic and geopolitical landscape dominated by developed nations. However, the world is currently undergoing rapid changes. Developing countries are assuming increasingly important roles and positions in the global economy. The robust resurgence of Russia’s military and political power as a superpower, along with China’s rise in economic, technological, and military domains, is unveiling a new global order. Furthermore, the relentless development of digital technology is profoundly and comprehensively reshaping the economic, social, and political fabric of nations worldwide. Global issues such as climate change and population aging play significant roles in shaping the future of the global economy and finance . The research objective is to reveal and analyze the main factors shaping the future of the global economy and finance. The article employs a qualitative research method with analysis, synthesis and commenting on secondary sources of information from related studies. The authors conclude that six main relevant factors can influence the future of the global economy and finance: (i) the development of digital technology; (ii) geopolitical situation; (iii) the international role of the US dollar; (iv) climate change; (v) population aging; (vi) the inevitability of structural transformation.
Since the global financial recession of 2008 and the subsequent sovereign debt crisis, the US economic supremacy has experienced setbacks. China has steadily grown into a dependable economic force across the globe, particularly in Asia. Is the renminbi on the verge of becoming a global currency given the financial domination setbacks of the US economy? In this critical review analysis, I contend that the dollar’s hegemonic position is at risk, but the political and economic climate does not appear to be ripe for renminbi globalization. The Chinese hawks see the economic sanctions levied against Russia following the Ukraine invasion as a chance to challenge the dominance of the US dollar. Furthermore, China has benefited from the first-mover advantage through the launching of the Central Bank Digital Currency. However, China must gain the trust of foreign users in the robustness of its financial system, economy, and digital yuan’s functionality for the globalization of the digital yuan to be effective. Moreover, to promote renminbi internalization, China must ease capital regulations, increase renminbi convertibility, and restructure its financial system.
When the 2007 global financial crisis hit financial markets, European leaders were quick to point the finger at US markets, excessive risk-taking, and insufficient regulation. However, it soon became apparent that European banks were more exposed than their Wall Street counterparts. With massive dollar liabilities, European banks were dependent on the US to act as a global lender of last resort. The crisis revealed a level of transatlantic interdependence that had been unknown to most observers and policymakers prior to the crisis. We argue that this represents a paradox, given that the project of the European Monetary Union was partly motivated by a desire to make Europe more independent from the US dollar. The euro was a response to the challenge of “it’s our dollar, but it’s your problem.” In this article, we examine how the European vulnerability to the US dollar that began post-Bretton Woods did not, in fact, disappear with the creation of a European currency. Instead, through financialization and deregulation, European financial markets developed new, complex interactions with US financial markets. This financialization of transatlantic banking flows created a new type of interdependence. As European banks were so heavily invested in US markets, this gave the US authorities a direct interest in bailing them out. While cross-border banking flows have decreased since the crisis, the interdependencies remain, and currency swaps were used once again to handle the economic fallout from Covid-19. In the area of financial and monetary policy, the transatlantic relationship remains strong and stable within a dollar hegemony.
Existing scholarship has not systematically examined BRICS (Brazil-Russia-India-China-South Africa) as a rising power de-dollarization coalition, despite the group developing multiple de-dollarization initiatives to reduce currency risk and bypass US sanctions. To fill this gap, this study develops a 'Pathways to De-dollarization' framework and applies it to analyze the institutional and market mechanisms that BRICS countries have created at the BRICS, sub-BRICS, and BRICS Plus levels. This framework identifies the leaders and followers of the BRICS de-dollarization coalition, assesses its robustness, and discerns how BRICS mobilizes other stakeholders. The authors employ process tracing, content analysis, semi-structured interviews, archival research, and statistical analysis of quantitative market data to analyze BRICS activities during 2009-2021. They find that BRICS' coalitional de-dollarization initiatives have established critical infrastructure for a prospective alternative nondollar global financial system. This title is also available as Open Access on Cambridge Core.
Little has contributed more to the emergence of today's world of financial globalization than the setup of the international monetary system. In its current shape, it has a hierarchical structure with the US-Dollar (USD) at the top and various other monetary areas forming a multilayered periphery to it. A key feature of the system is the creation of USD offshore – a feature that in the 1950s and 60s developed in co-evolution with the Bretton Woods System and in the 1970s replaced it. Since the 2007–9 Financial Crisis, this ‘Offshore US-Dollar System’ has been backstopped by the Federal Reserve's network of swap lines which are extended to other key central banks. This systemic evolution may continue in the decades to come, but other systemic arrangements are possible as well and have historical precedents. This article discusses four trajectories that would lead to different setups of the international monetary system by 2040, taking into account how its hierarchical structure and the role of offshore credit money creation may evolve. In addition to a continuation of USD hegemony, we present the emergence of competing monetary blocs, the formation of an international monetary federation and the disintegration into an international monetary anarchy.
The relative decline of the U.S. as a global economic power is clear, and can be seen in the statistics. However, the U.S. decline is nevertheless a slow one, and carries all sorts of unprecedented dangers for the world. The U.S. is definitely in a less powerful position than previously with respect to production, but it is still successfully siphoning off much of the economic surplus (or surplus value) created in the developing countries via the operations of its multinational corporations and its hegemony over the global financial architecture. With respect to U.S. financial dominance, the key issue becomes the continuation of the dollar as the hegemonic currency, which is currently threatened by the rise of China. This paper intends to critically analyse the performance of the U.S. economy and also the role played by the U.S .dollar in the international payment and in reserve currency. The study will also examine the expansion of Chinese economy and importance of the gradual development of a multicurrency system with the intention of reducing the growing balance of payments deficit putting pressure on a single reserve currency. This study has followed doctrinaire methodology, which includes analytical, descriptive and comparative methods. This article concludes that the U.S. economy is currently suffering from a serious trade deficit and the position of the U.S. dollar is under genuine threat from the renminbi, the renminbi will not be able to replace the U.S. dollar as the global currency for at least the next decade. (JEL E50, 60, F30, G15)
Reviews and summarizes different public choice approaches used in the literature to study International Sanctions
For most of the last century, the preeminent role of the U.S. dollar in the global economy has been supported by the size and strength of the U.S. economy, its stability and openness to trade and capital flows, and strong property rights and the rule of law. As a result, the depth and liquidity of U.S. financial markets is unmatched, and there is a large supply of extremely safe dollar-denominated assets.
We document a decline in the dollar share of international reserves since 1999. This decline reflects active portfolio diversification by central bank reserve managers, rather than changes in exchange rates and interest rates, reserve accumulation by a handful of central banks with distinctive balance sheets, or changes in coverage of surveys of reserve composition. Strikingly, the shares of the euro, yen and pound sterling have not concurrently increased. Instead, the shift out of dollars has been in two directions: a quarter into the Chinese renminbi, and three quarters into the currencies of smaller countries that have played a more limited role in reserves. The evolution of the international reserve system in the last 20 years is thus a gradual movement away from the dollar, a modest rise in the role of the renminbi, and changes in market liquidity, relative returns and reserve management enhancing the attractions of nontraditional reserve currencies.
Scholarship on international currencies has traditionally emphasised how an issuing state’s foreign policy can enhance the attractiveness of its currency for cross-border use. Yet, foreign policy actions need not only boost a currency’s international appeal—they may also undermine it. This study introduces a general theory of how US foreign policy can influence governments’ policy orientations toward the dollar in positive or negative ways. Policies like financial sanctions generate ‘political risk’ that weaken the dollar’s attractiveness for international use. The study tests the claim that the United States’ use of financial sanctions incentivises targeted governments to implement de-dollarization policies. I employ a most-likely case study design, presenting evidence from three countries targeted by US sanctions: Russia, Venezuela and Turkey. In each instance, the evidence shows that financial sanctions created political risk concerns by generating expectations of future direct costs of dollar use. These expectations set off policy efforts by targeted governments to reduce their economies’ exposure to the currency. This study raises important questions about the long-term efficacy of an approach to foreign policy that relies on financial sanctions as a primary means of leverage over foreign adversaries as overuse may undermine the effectiveness of the tool itself.
How does dollar centrality persist in the face of continuous US current account deficits and a steadily worsening net international investment position? Two mechanisms create a structural basis for dollar centrality, explaining how dollars enter global credit markets and why surplus countries continue to hold dollar-denominated assets. First, institutional structures deriving from late development suppress domestic demand in major current account surplus countries, making them reliant on external demand for growth. Local banks recycle those dollars into the global economy, creating huge dollar liabilities and assets on their balance sheets. This locks them into continued use of the dollar and reliance on the US Federal Reserve during crises. Second, US firms participating in the global unbundling of production have constructed commodity chains in which they capture disproportionate shares of global profits through their control over Intellectual property. These profits sustain valuations and thus the attractiveness of dollar-denominated assets. Routinization in use of the dollar and compliance with Trade-Related Aspects of Intellectual Property Rights (TRIPS) and US controlled commodity chains creates infrastructural power in Michael Mann’s sense. This routinization sustains US geo-economic power in the face of persistent current account deficits and growing net international debt relative to US gross domestic product.
The global reserve system can be strengthened by increasing the role of alternative currencies. A gradual evolution to a multicurrency system reduces pressure on a single reserve currency issuer from an ever‐growing balance‐of‐payments deficit. It also allows countries to better diversify their foreign exchange holdings. Given the continuing strong economic growth in the China and its growing influence on the world economy, the renminbi will likely emerge as a new international currency. However, this is contingent on the China accepting a more convertible capital account and developing an efficient financial system. Internationalising the renminbi will likely be a gradual and drawn‐out process. Simulations show that, with greater convertibility, the renminbi could gradually become an international currency within Asia and beyond – sharing from 3 to 12 per cent of international reserves by 2035.
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