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Grant Newsham, "War in the Taiwan Strait is not unthinkable," Asia Times, 1-15-2020, https://asiatimes.com/2020/01/war-in-the-taiwan-strait-is-not-unthinkable/-- 嘉玮

Conflict not confined

Russia’s invasion of Ukraine has raised the specter of nuclear war, as Russian President Vladimir Putin has placed his nuclear forces at an elevated state of alert and has warned that any effort by outside parties to interfere in the war would result in “consequences you have never seen.” Such saber-rattling has understandably made headlines and drawn notice in Washington. But if China attempted to forcibly invade Taiwan and the United States came to Taipei’s aid, the threat of escalation could outstrip even the current nerve-wracking situation in Europe.

A recent war game, conducted by the Center for a New American Security in conjunction with the NBC program “Meet the Press,” demonstrated just how quickly such a conflict could escalate. The game posited a fictional crisis set in 2027, with the aim of examining how the United States and China might act under a certain set of conditions. The game demonstrated that China’s military modernization and expansion of its nuclear arsenal—not to mention the importance Beijing places on unification with Taiwan—mean that, in the real world, a fight between China and the United States could very well go nuclear.

China’s recently resolved Doklam Plateau standoff on its border with India and Bhutan similarly illustrates China’s separation of geopolitics from economics. The Doklam Plateau is almost literally in the middle of nowhere. China’s road-building there was in many ways similar to its island-building in the South China Sea. Both represent the development of infrastructure in remote locations in order to establish a permanent Chinese presence in previously unoccupied territories. They are bold geopolitical provocations, but they are geoeconomically irrelevant. With China, as in the rest of the world, geopolitical conflicts are confined to the zone of irrelevance. In the parts of the world that matter, geoeconomics is the order of the day. With its OBOR initiative, China is at the forefront of moving from geopolitics to geoeconomics as the basis of its foreign relations. Unlike in the Doklam and the South China Sea, China has no territorial ambitions along its belt and road routes. Instead, it seeks to leverage economic statecraft for political gain. For example, not long after Chinese state-owned shipping company COSCO made a major investment in Athens’ port of Piraeus, the Greek government blocked an EU effort to criticize China’s human rights record. Similarly, at China’s behest the Dalai Lama has repeatedly been denied a visa to enter South Africa. South Africa is a major beneficiary of Chinese largesse that has gained entry into the BRICS summit club—joining Brazil, Russia, India and China—entirely at China’s behest. The problem for China is that it does not control access to major global networks that people value for their own sake. As a result, China’s geoeconomic checkbook diplomacy is fundamentally transactional. This is very different from the classical Chinese tianxia, under which the countries of East Asia valued access to China’s learning, technology and unique products and thus were willing to accept the trappings of nominal Chinese suzerainty in exchange for the privilege of trading with China. In the old tianxia, China was the center of the world and could use that position to its advantage. In the new geoeconomics, China must pay full price to meet its foreign policy goals. The most recent BRICS summit in early September is a case in point. Just a week before the opening of the summit in Xiamen, in eastern China’s Fujian province, Chinese and Indian troops were facing off on the remote Doklam Plateau 1,700 miles to the west. But Xi presumably didn’t want to see the crisis disrupt an economic summit on his own home turf; early in his career he had served as deputy mayor of Xiamen and governor of Fujian. So he bought India off with a geopolitical withdrawal in order to meet his geoeconomic goals. China can afford its many geoeconomic initiatives—the BRICS-sponsored New Development Bank, its own Asian Infrastructure Investment Bank, multiple OBOR initiatives, diplomatic offensives to isolate Taiwan—but the fact that it has to pay for them underlines the point that for China, geoeconomics is a costly game. China has to buy its friends. The U.S., by contrast, gets its friends for free. People are even willing to pay to join the U.S. “club,” as when countries buy U.S. airplanes or military hardware as the price of U.S. friendship. In its exercise of geoeconomic power, China rewards while the U.S. punishes. That’s because the U.S. is in the enviable position that mere access to its geoeconomic infrastructure is valuable in itself. Countries are not paying China for the privilege of joining OBOR; China is paying them to join. China has effectively paid India to keep quiet and stay in the BRICS, paid Greece to plead its case at the EU, and paid dozens of African countries to allow Chinese state-owned firms to build infrastructure at below-cost rates. China even donated a new headquarters building for the African Union—and sent a Chinese crew to Addis Ababa to build it. By contrast, more than a million international students—nearly a third of them Chinese—pay to study in the U.S., subsidizing American colleges while absorbing American values. More than 500 foreign companies are listed on the New York Stock Exchange, subjecting themselves to U.S. government oversight, and the U.S. dollar is on one side of the deal in 88 percent of all international currency transactions. The whole world relies on the American-dominated internet, the American-provided Global Positioning System (GPS) and American-owned computer and mobile phone operating systems. It is difficult to do business of any kind in today’s integrated economy without using U.S.-linked systems of one kind or another, which is why the U.S. is uniquely powerful in the imposition of economic sanctions. Geoeconomics isn’t everything, and sanctions may not be able to solve all of the world’s geopolitical crises. Sometimes boots on the ground and missiles in the air are the only ways to achieve important policy and humanitarian goals. But geoeconomics is increasingly important, and in that realm, the U.S. is vastly more powerful today than postwar America was in its Cold War heyday. It is worth remembering that the U.S. at its geopolitical zenith struggled to contain an impoverished China in the Korean War and failed to contain an impoverished North Vietnam in Southeast Asia. Today, geoeconomic centrality gives the U.S. much more power to influence the policies and behaviors of other countries than military force ever did. Hegemony is dead. Long live centrality.

The financial sanctions imposed on Russia by Washington and its allies have put Beijing on notice. In the event of a military conflict over Taiwan, China now knows what to expect from the United States. Beijing will therefore accelerate efforts to promote the renminbi as an international currency and reduce its dependence on the dollar. But the greenback will remain the dominant international currency and will continue to provide Washington with significant geo-economic power.

True, China’s far greater economic weight compared to Russia will make some American allies more hesitant to support US financial sanctions in the event of a military clash. But the implicit or explicit threat of US secondary sanctions should help persuade them to support American policies, even if the economic costs of doing so will be considerable. Should the US Navy impose a blockade on Chinese seaborne trade, financial and currency sanctions will become less meaningful, as they derive their effectiveness largely, if not exclusively, from restricting a country’s international trade.

“The U.S. Dollar has been the preferred global currency since the end of World War II, providing our nation inherent economic advantages as well as responsibilities. “Today an estimated 88% of all currency transactions by value are conducted in U.S. Dollars. Among other things, this limits the risk of a balance-of-payments crisis which inherently lowers our exchange rate risk. “The Dollar’s position also allows the United States – and Americans – to borrow at rates as much as 50-60 basis points lower. “Our currency’s strength not only benefits the U.S. Government, but also helps the American consumers by lowering the price of imported goods, resulting in an estimated 25 to 45 billion dollars a year in savings. “Further, the dominant Dollar offers investors dependability and a safe haven in times of economic uncertainty, as seen during the 2008-2009 financial crisis and more recently in the economic shock caused by the coronavirus pandemic. “Finally, possibly the most important advantage of having the global reserve currency within our country is embedded in the title of our Subcommittee…National Security. “The Dollar’s status allows us to apply powerful economic sanctions, which when used properly as a targeted tool, can alter our adversaries’ actions in a way that advances U.S. and global security. “Today, the biggest threat to American and global security is the Chinese Communist Party. “Next week Treasury Secretary Yellen will appear before our committee, and one thing that I hope to find out is, “Does this administration have a plan for when China, inevitably, attacks Taiwan?” “I asked the same question to Under Secretary Nelson in April and was not impressed by his answer. “Committee Republicans see the writing on the wall and have acted decisively by putting forward meaningful legislation. I only hope that the administration also has some foresight. “Sanctions are a powerful tool, and their use should not be considered lightly. As such, diverse opinions exist on the effectiveness of the U.S. approach to sanctions. “Some believe that carrying out sanctions too broadly, rather than in a targeted manner, can have a negative effect and ultimately undermine dollar dominance. Others believe we should use every tool in our kit to maximum effect. “Because of the formidable impact that even U.S. unilateral sanctions can have, adversaries – and even some friends – have sought alternative payment methods and systems. “It is anticipated that when the ‘BRICS’, which stands for Brazil, Russia, India, China, and South Africa, have their annual Summit this summer, they will discuss the feasibility of a common currency mechanism for trade among their countries as an alternative to the Dollar. “Other countries, including Saudi Arabia, Iran, Argentina, the UAE, Algeria, Egypt, Bahrain, and Indonesia, have also expressed interest in such a mechanism. “While I don’t think this idea is practical at the moment, something like it could materialize in the not-so-distant future. “China is also engaged in creating an alternative in the form of a central bank digital currency, or CBDC, which the Chinese Communist security agencies intend to use to surveil the financial activity of any user. “Because the e-CNY presents an assault on financial privacy and a risk to our national security, I introduced H.R. 804: the Chinese CBDC Prohibition Act of 2023. “This bill prohibits U.S. money services businesses from engaging in transactions involving a central bank digital currency issued by China. “Eventually, the United States will need to make a decision, do we open the door to the expansion of the CCP’s digital dollar or do we slam it shut? My bill slams the door and locks it. “Finally, our own domestic actions could make Dollar-based assets less attractive, particularly the unsustainable federal spending trajectory and the resulting inflation that spread around the world. “We must take this risk seriously. It is all too clear that inflation is undermining U.S. national security. “The good news is that despite attempts by the Chinese government and other bad actors, the Dollar seems secure for now, as there is no clear or immediate alternative to serve as the global reserve currency. “But to ensure that remains the case, we must keep our eye on the ball and preserve and protect this key national asset.”

Economic renewal and fiscal reform have become the preeminent issues, not only for domestic and economic policy but for foreign policy as well. As the former chairman of the Joint Chiefs of Staff, Adm. Michael G. Mullen, was fond of saying, national debt has become perhaps our top national security threat. And neither major presidential candidate is doing enough about it. This issue needs to be framed as crucial not just for our future prosperity but for international stability as well.

The United States has been running trillion-dollar deficits, resulting in a huge explosion in the country’s indebtedness. Publicly held debt now equals 70% of gross domestic product, a threshold many economists consider significant and highly worrisome. Making matters worse, half of our current deficit financing is being provided by foreigners. We are getting by with low interest rates and tolerable levels of domestic investment only because they find U.S. debt attractive, which may not last.

The US dollar has been the dominant global reserve currency for decades and during this time, plenty of competitors have emerged and vanquished. Also, it’s a fact, the dominance of dollar has been so widespread that a considerable number of individuals had never contemplated the possible outcomes of forsaking it in favor of an alternative. However, recent developments in international order might suggest that the US dollar’s position is precarious this time. Considering his concerns over eroding away of US dollar’s dominance, Fareed Zakaria, political commentator, in a recent episode of his show on CNN said, “If the US dollar’s global supremacy erodes, America will face a reckoning like none before”. In such circumstances, the recent developments in the international system do insinuate a threat to the greenback, however, it engenders many questions as well. One inevitable question that could not be set aside is: what these developments would mean to global capitalism? Historically, the United States’ dollar has been ruling the financial world since the culmination of World War II and with the subsequent inception of the in the mid-1940s as an effort to stabilize the international monetary system. This system created a collective international currency exchange regime pegged to the U.S. dollar which was, in turn, pegged to the price of gold. However, this Bretton Woods system collapsed due to the increasing competitiveness of European and Japanese exports with the US exports, meaning it was importing more than it was exporting. This, coupled with rising inflation and a decrease in US gold reserves, put further pressure on the dollar’s peg to gold. Consequently, In 1971, President Nixon announced his new economic policy, “”, which ceased the direct convertibility of U.S. dollars to gold that ended both the gold standard and the limit on the amount of currency that could be printed. In spite of this event, the dollar remained the world’s reserve currency or maybe there existed no viable reserve-currency alternatives at that time. However, the situation might seem different today as many nations – Russia, China, Iran, India, Brazil, Argentina, and Saudi Arabia – have accelerated efforts in recent months toward arrangements to reduce their dependence on the dollar. Recently, the Russian president has endorsed “yuan” as the currency of choice at the three-day summit of Chinese president, Xi Jinping. In his talks, Putin said, “We are in favor of using the Chinese yuan for settlements between Russia and the countries of Asia, Africa and Latin America”. Apart from this, speculations are being made that the BRICS might come up with “” as a better alternative reserve currency which would be pegged to the value of gold. There could be several reasons behind these clumsy moves, however, one reason that couldn’t be shunned is the Ukrainian war. According to political economists and sanctions analysts, the United States’ dominance over the global financial system and its ability to it, raises concerns for other nations that the US could anytime use the power of its currency to target them the way it has sanctioned Russia. This maneuvers them to abridge their dependence on the dollar and subsequently, propels them to test other alternatives to reduce the dollar’s hegemony.

However, as interest rates on U.S. Treasury securities rise, so too will the federal government’s borrowing costs. The United States was able to borrow cheaply to respond to the pandemic because interest rates were historically low. However, as the Federal Reserve increases the federal funds rate, short-term rates on Treasury securities will rise as well — making some federal borrowing more expensive. Expectations about short-term rates and inflation have already pushed up longer-term rates as well.

In February, the Congressional Budget Office (CBO) projected that annual net interest costs would total $640 billion in 2023 and double over the upcoming decade, soaring from $739 billion in 2024 to $1.4 trillion in 2033 and summing to $10.5 trillion over that period. However, if inflation is higher than CBO’s projections and if the Fed raises interest rates by larger amounts than the agency projected, such costs may rise even faster than anticipated.

When inflation is higher, this tends to have a depressing affect on the value of a country’s currency. This is because increased inflation reduces the currency’s buying power, which weakens it against other currencies. The impact of increasing inflation on currency conversion rates is usually downwards.

How Can Inflation Affect Cross-Border Money Transfers?

The impact inflation has on the time value of money is that it decreases the value of a dollar over time. The time value of money is a concept that describes how the money available to you today is worth more than the same amount of money at a future date.

This also assumes you do not invest the money available to you today in an equity security, a debt instrument, or an interest-bearing bank account. Essentially, if you have a dollar in your pocket today, that dollar’s worth, or value, will be lower one year from today if you keep it in your pocket.

Current inflationary problems are not “transitory” but seem more likely to be sustained by a long list of overlapping and negative supply side shocks: prepandemic resource misallocations of capital driven by easy money, post-pandemic “hysteresis” affecting both capital and labor, population aging, climate change and the heavy costs of both adaptation and mitigation, commodity price increases, and finally deglobalization. Persistently high inflation could eventually lead to higher real interest rates that would reveal all of the underlying fragilities that have built up over the years.

Nor are we well-placed to manage another global crisis. Political problems are lurking under the surface almost everywhere, not least because of rising inequality, and these will be aggravated by either rising inflation or rising unemployment which disproportionally affect the poor. Moreover, our crisis management tools are heavily constrained or otherwise inadequate. Finally, needed debt restructuring will be constrained by inadequate laws and administrative procedures. Indeed, at the international level, we even lack basic principles to guide sovereign debt restructuring.

After World War II, the United States emerged as the largest economy and the most powerful military and political force in the world. In 1944, at the Bretton Woods Conference in New Hampshire, the US and other major countries agreed to establish a new international monetary system based on fixed exchange rates, with the US dollar as the anchor currency. Under this system, other countries could peg their currencies to the US dollar, and the US would guarantee to exchange dollars for gold at a fixed rate of $35 per ounce.

This system worked well for several decades, as the US economy grew and the dollar became the primary currency for international trade and finance. However, in the 1960s, the US began to run large trade deficits and spend more on the Vietnam War, which led to a loss of confidence in the dollar and a rise in inflation. In 1971, President Nixon announced that the US would no longer redeem dollars for gold, effectively ending the Bretton Woods system and leading to a period of floating exchange rates and greater volatility in currency markets.

While the dollar enjoys an extraordinary lead over other international currencies, it is not invincible. Poor domestic policies could shake confidence in the dollar. Structurally, the United States’ liquidity-creating role—providing dollar assets to the rest of the world—and the ability to invest in the United States can interact unfavorably with low savings in the United States, resulting in large deficits, rising public and/or private debt. Unlike the euro-zone, however, the United States does not face the prospect of involuntary sovereign default because the dollar is a convertible sovereign currency. The recent specter of US default, a possibility which arises periodically, is entirely voluntary and due to a self-imposed debt ceiling. In the United States, the upper bound of the debt limit is rather determined by foreigners’ willingness to hold dollars, at worst resulting in inflation and depreciation. Although the United States cannot be forced to default, such an adjustment process may not be benign.

China is not ready to shoulder the burden of a dominant renminbi

Foreign ministers from the Brics countries – Brazil, Russia, India, China and South Africa – met in June along with ministers from other countries, including Iran, Egypt, the United Arab Emirates and Saudi Arabia. On the agenda was the possibility of expanding membership of the group to include these countries, and Russia added urgency to the proceedings because of the impact of western sanctions.

The problem is that Brics is not an especially useful economic term. It marries an economic superpower in China with a potential one in India with three essentially stagnant commodity exporters.

Far from being a remotely sensible optimal currency area, the economies are dramatically different in terms of trade, growth, and financial openness. While Russia’s economic performance was clearly the weakest of the five Brics last year, Brazil and South Africa have struggled to prosper without strong commodity prices underpinning low interest rates and rising domestic credit.

However, the U.S. dollar’s incumbent role in the global economy is unlikely to be seriously challenged any time soon for four key reasons: The U.S. dollar remains the world’s dominant “medium of exchange,” or means of buying and selling goods. In March, for instance, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) reported that the U.S. dollar was the most commonly used currency on its global payment system, accounting for 41.7% of payments, followed closely by the euro. By comparison, the Chinese renminbi was used in 2.4% of SWIFT payments, despite China accounting for a relatively larger percentage of global trade. The dollar also remains the primary “unit of account” globally, meaning it serves as the standard way that trading partners measure the market value of goods and services being exchanged. According to the Federal Reserve, from 1999-2019, the U.S. dollar accounted for 96% of trade invoicing in the Americas, 74% in the Asia-Pacific region and 79% in the rest of the world. The only exception was in Europe, where the euro is the primary invoicing currency, given frequent trading between EU partners. The U.S. dollar is widely viewed as a reliable “store of value,” or safe haven. In large part because of this stability relative to other currencies, the greenback accounts for nearly 60% of foreign reserves (i.e., the currencies held by central banks to help manage their nation’s monetary system and exchange rate). While the U.S. dollar’s share of central bank reserves has declined over time, it still dwarfs the shares of all competitors. What’s more, according to the Brookings Institution, more than 65 countries peg their currency to the U.S. dollar. There is currently no viable alternative. Other currencies have been discussed as potential competitors to the U.S. dollar, but none comes close to posing a credible threat—at least, not yet. The euro is the world’s second-largest reserve currency, but ranks a distant second, accounting for 21% of foreign reserves versus the dollar’s nearly 60%. Key factors inhibiting the euro’s broader use: According to the National Bureau of Economic Research, there is an inadequate supply of high-quality, euro-denominated assets that international investors and central banks can use as a store of value, and no eurozone-wide “safe” government-backed asset. China’s renminbi accounts for a very small portion of foreign exchange reserves, and Chinese policymakers’ control over the exchange rate makes it unlikely to quickly gain traction. Gold is time-consuming and expensive to move, thus making it less than ideal as a medium of exchange or unit of account. A BRICS common currency is still very hypothetical. BRICS nations may find it challenging to coordinate across central banks and could ultimately prove unwilling to exchange their U.S. dollar reliance for a potentially volatile currency that could struggle to achieve broader adoption. Given these circumstances, it would be hard to break away from the dollar-centric system. It is entirely possible that multiple major reserve currencies will emerge, based on trading relationships—for example, the euro in Europe, the renminbi in Asia and the U.S. dollar in the Americas—but it would likely take decades to fully supplant the global primacy of the dollar.

A couple of recent geopolitical events have prompted the hoary old question of whether the dollar’s hegemony as the world’s reserve currency is at risk. It isn’t. Not in the slightest. If anything, the developments just serve to underline why King Dollar sits atop the throne. The most recent challenger is a putative South American common currency, with the working title of the sur (south). It’s an idea that’s been kicking about since the 1980s, but my colleague Eduardo Porter believes it is either dangerous or irrelevant. If it ever comes to pass, it would be used to facilitate trade between Brazil and Argentina (though they’d retain their respective currencies). Other South American countries could be tempted to join if it succeeded in smoothing the bumps of illiquid, volatile local currencies. But there is something that does that already — it’s called the US dollar. The dollar remains the global currency, with half of the $2 trillion notes in circulation outside the US. In many countries, its retail day-to-day usage supersedes the local currency. Some 40% of the world’s debt is issued in dollars. It affords the US an exorbitant privilege. Its vast current account deficit is far less of a problem, as the imports its voracious consumer sector sucks in are frequently purchased in dollars. It also confers a huge amount of control, as any institution or individual on the wrong side of the US Treasury’s long arm can attest to. But it also means the US serves as the global lender-of-last-resort. Nearly 60% of global currency reserves are in dollars, with the euro taking second place on 20%. Close to 90% of all foreign exchange trades involve the dollar. The global pandemic stimulus response was underpinned by vast currency swaps between the Federal Reserve and friendly central banks. While its trade-weighted strength has slipped recently, it’s no coincidence that the greenback has strengthened for most of the period since the global financial crisis. The recent cryptocurrency crash underlines how tough it is to take on the ruling champion. The US economy, along with its bonds and equities, has become the preferred haven for global investors in bad and good economic times alike — a phenomenon known as the dollar smile. The bigger mooted threat to the greenback’s status is talk of China and Saudi Arabia trading hydrocarbons in non dollars. Saudi has replaced Russia as the largest source of crude for Beijing, supplying 15% of the 350 million barrels China bought in December alone. Old-as-the-hills barter can work for Chinese trades with Russia, and indeed Iran. But it is unlikely that Saudi will have much use for either Chinese products or yuan, for the equivalent $50 billion annual value of crude oil it exports to the world’s second-largest economy. Invoicing in euros may solve part of the equation, but there are limits there too. Saudi needs to make a return on its currency holdings; US Treasuries not only yield more than either Chinese or European sovereign bonds, but also benefit from being probably the most liquid securities on the planet. US currency dominance would be undermined if a rival petrocurrency emerged. But there are very good reasons why the vast majority of global hydrocarbon trade is denominated in dollars, and will remain so. The Organization of Petroleum Exporting Countries, now with Russia partially in the fold, is incapable of controlling either the price or supply of crude. It doesn’t have the chops to establish a rival currency. The obvious advantages for the buck are familiarity and scale. Size matters: Around 40% of global trade is invoiced in dollars, four times larger than the US share of global trade. The greenback accounts for 42% of volume across the SWIFT network for interbank transactions. The yuan’s share is 2%. The euro conducts an impressive 36%, but this is mostly intra-euro zone business between the common currency’s 20 members. The euro’s share of global trade is a more modest 16%. There simply isn’t traction for alternatives to the dollar outside respective domestic zones of influence. The domestic necessity of controlling one’s own currency hugely outweighs the elusive charms of being part of a supranational network; witness the doubts that still cling to the euro’s fitness for purpose given the economic gaps between its member nations. Until and unless the major Asian powers of India, China, Japan and Korea decide to create a new currency, the dollar will remain the world’s currency of first resort.

More than a decade after the Global Financial Crisis (GFC), it is a good moment to reassess power relations in the international monetary system and analyse the state of US dollar hegemony. In the aftermath of the great recession, there was a certain consensus that it had reached its peak. For the first time, Chinese policymakers were openly calling for moving away from the greenback and starting in earnest to promote the renminbi’s (RMB) internationalisation. At the same time, the then-fashionable BRICS (Brazil, Russia, India, China and South Africa), which had weathered the crisis relatively well, also began having regular summits to promote the use of their domestic currencies. And even European leaders like Nicolas Sarkozy took advantage of France’s G20 presidency in 2011 to discuss how to reduce the world’s dollar dependence. Since then, many important geopolitical events have happened. In 2012 the European debt crisis almost ended in Grexit, although the euro finally survived, and the eurozone, thanks to a series of ambitious reforms, became structurally more resilient. In 2016 Trump came to power and pulled out of the Iran deal, pushing the Europeans to find alternative ways to conduct trade and settle energy imports (especially gas) without relying on the dollar. Then, in 2020, came the pandemic, again massive quantitative easing, and in 2022 the war in Ukraine with the consequent freezing of Russian assets in western countries, and in the same year a ‘steep’ hike of interest rates by the Federal Reserve (Fed) to fight their effects. The question, however, is whether these shocks have transformed the international monetary system in a substantial manner. On the one hand, some argue that these episodes have only reinforced the centrality of the dollar. The greenback is still, by far, the global currency of choice, as individuals, corporations and monetary authorities continue to rely heavily on the dollar as a medium of exchange, a unit of account and a store of value. Moreover, the Fed remains the de facto central bank of the world, as evidenced by the enormous liquidity that it provided through its currency swap lines to both developed and developing countries during the COVID-19 lockdowns, as well as the dollar shock unleashed by its rising rate policy in Europe and beyond.

By one estimate, the dollar is a part of 88% of all international transactions. Some people fear this dominance cannot last, while others question whether it should: Doesn’t a stronger dollar hurt US exports, and thus US workers?

The good news, for Americans at least, is that dollar hegemony is beneficial for the US, its government and most of its citizens. Furthermore, it is likely to last for the foreseeable future.

The centrality of the U.S. dollar in world affairs is mainly determined by economic factors, but geopolitical forces are threatening to weaken its top spot in the currency hierarchy. U.S. sanctions in response to Russia’s invasion of Ukraine have pushed some countries to further reduce their reliance on the dollar. The geopolitical tug of war between allies and foes, liberal and illiberal states carries high stakes. “Great powers have great currencies,” quipped the Nobel laureate Robert Mundell. If the currency system were to become multipolar, U.S. monetary perks would recede, as would the United States’ global economic influence and its ability to use dollars as an alternative to military force when policing international order.

A more fragmented global economy in which security partnerships determine economic relations is coming into view. But an end to the dollar’s dominance is still unlikely. Countries participating in the sanctions against Russia or benefiting from U.S. currency coercion aimed at upholding the liberal international order’s core principle of nonaggression have no incentives to diversify away from the dollar. Even countries opposing Western sanctions are likely to stick with the dollar to preserve their own security and U.S. security guarantees in a hardening geopolitical climate.