PHOTO: AFP/FILE

REUTERS, London

As President Donald Trump launches his tariff war against both friends and foes of the United States, concerns are once again surfacing about the US dollar’s future as the global reserve currency. China would dearly like to dethrone the mighty greenback. Leading members of Trump’s new administration appear like-minded. Yet for more than half a century, the dollar has defied the doom-mongers. And the most likely prospect is that it will continue to do so.

The durability of US currency’s long reign is recounted in Paul Blustein’s magisterial new book “King Dollar: The Past and Future of the World’s Dominant Currency”. In the 1960s, the Belgian economist Robert Triffin predicted that dollar’s role as the lynchpin of the post-war monetary order would come unstuck as the United States got ever further into debt. Triffin was vindicated when the Bretton Woods system of managed exchange rates collapsed in the early 1970s. As US inflation took off, Charles Kindleberger declared that “the dollar is finished as international money.” The great economic historian was wrong.

Over the following decades the dollar survived a number of other challenges: the rise of Japan in the late 1980s; the creation of the euro in 1999; the global financial crisis and the emergence of China as a global manufacturing superpower; and a succession of US governments using the “dollar weapon” against its foes, culminating in the seizure of Russia’s foreign exchange reserves after President Vladimir Putin’s invasion of Ukraine in 2022.

Although the US share of global economic output has halved since 1945, the dollar still accounts for around 60 percent of international foreign exchange reserves. Its dominance in financing trade is greater: while US imports and exports amount to less than 10 percent of global trade, three-quarters of cross-border commerce is invoiced in the American currency. Its role in global finance is even more pronounced: 85 percent of currency swaps and an even greater share of foreign interbank transactions are denominated in dollars. As Blustein says, “at each juncture, forecasts of the dollar’s demise proved wrong, sometimes because of the weaknesses of the challenger currencies, at other times because of the dollar’s surprising resilience.” In the language of foreign exchange traders, it has remained “the least dirty shirt.”

That dominance owes much to American military hegemony, widespread trust in the rule of law in the United States, and confidence that an independent Federal Reserve will retain the dollar’s role as a store of value. A more prosaic explanation is that transacting in dollars is more convenient for all parties. Foreign trade and global finance require a unit of account that can be used for settling trades. The dollar has far greater liquidity than any other currency. China may be the world’s largest exporter, but the yuan is used in only a tiny share of trade. International financial transactions are mostly settled in US dollars through the Clearing House Interbank Payments System (CHIPS) which is domiciled in New York and handles transactions worth nearly $2 trillion each day. Almost all the payments that go through this system begin and end outside of the United States, according to Blustein.

The dollar’s dominant role in the plumbing of the global financial system creates a network effect like the powerful forces that benefit the world’s largest technology companies. Over the years, Microsoft has made many missteps. The software giant has botched launches of browsers, smartphones, tablets and upgrades of its operating system. Likewise, Facebook owner Meta Platforms failed to establish a global digital currency while its attempt to launch a market for virtual reality has so far been a flop. Yet both companies have survived with their dominant positions intact. US enemies are like Microsoft’s disgruntled customers: however much they would like to find an alternative to the dollar the switching costs are simply too high.

The dollar’s role as the world’s reserve currency is not costless to Americans, however. As Triffin observed in the 1960s, the global economy needs more dollars to expand. But supplying foreigners with the global reserve currency drives the United States ever further into debt. The fact that the United States is the world’s largest international debtor, with foreign liabilities exceeding foreign assets to the tune of $26 trillion, is a feature, not a bug, of the dollar’s international standing. Triffin predicted that sooner or later a tipping point would be reached when the issuer of the reserve currency would be unable to service its debts. Even though that moment may not have arrived, the problem should not be ignored.

Members of Trump’s administration have identified another issue with the dollar’s role as the reserve currency. Vice President JD Vance believes endemic US trade deficits are the corollary of the capital account surpluses that are required to maintain the currency standard. These trade deficits, he says, have resulted in the hollowing out of US manufacturing. Vance claims reserve currency status is a “massive tax on American producers”. Michael Pettis, an economist at Peking University, comes to a similar conclusion.