Great Graphic: Dollar’s Role

This Great Graphic comes from Peter Coy and team’s article in Business Week. It succinctly shows three metrics for the internationalization of domestic currencies: global payments, international bonds, and foreign exchange reserves. It does not strike me as surprising, and the role of the euro as a payments currency reflects its role in intra-European trade.  

The substance of the article bears little relation to the inflammatory title: “The Tyranny of the Dollar,” or the call-out: The incumbent international currency has been American for decades. Is it time for a regime change? I get it, titles grab attention, but this one is deceiving. There is nothing that explains why the dollar’s role is tyrannical? Indeed, as the article notes, the US made dollar’s available to foreign central banks during the crisis, and even now. The dollar has been a public good provided by the US.  Foreign banks participated in the Fed’s QE and subsequent operations more than many suspect.  

Indeed,  it is precisely because the US has been more willing to deny countries and companies it disapproves of access to this public good, that it provides an opportunity for a workaround or alternative, and Coy & team recognize that. However, and here too the substance of the article has it right. The alternatives are not particularly compelling. The role of the different currencies is not determined by some centralized world government of course, but by the independent decisions by thousands of economic actors.  

Some mistake the policy under the Trump Administration as isolationist. From that assessment, they draw conclusions about the potential implications for the dollar and interest rates (spoiler alert: not good). What is Trump is not an isolationist? What if the US is not disengaging from the world but is not operating primarily through multilateral institutions? There is precedent for this kind of American behavior (see the war on Iraq for example, and the withdrawal from the Kyoto Protocol) though Trump takes it further. US military operations continue, and the recent Freedom of Navigation near a reef (that has been weaponized) that spurred Chinese ire is a timely example.