The dollar is the world's reserve currency, the backbone of the globalized economy. Would that remain the case if political instability throws the U.S. off-balance in an election year? Maybe. So far, though, no real alternative is emerging.
The "dominance of America's currency is harder than ever to overturn," Eswar Prasad said at Foreign Affairs. Other countries don't like that financial power, which "exposes their economies and financial systems to the vagaries of U.S. policies." But the "gap between [the dollar] and any putative rival has only grown and shows no signs of stopping."
What did the commentators say? "The big threat to dollar dominance is American dysfunction," Steven B. Kamin and Mark Sobel said at the Financial Times. The dollar gets its strength from the size of the American economy, which produces 25% of global GDP. That could all go away, though, if "U.S. political dysfunction continues to run amok" and politicians continue to add to the national debt at unsustainable rates, Kamin and Sobel said. If the U.S. "doesn't keep its house in better order, dollar dominance will be the least of our worries."
"What is striking about America is how immune its markets appear to be to the threat of political dysfunction and fiscal frailty," said The Economist, even as other economies struggle. For now, at least, America is the "world economy's only bulwark." But that could be undone by "political dysfunction and reckless fiscal policy in Washington."
What next? There are signs that investors are feeling cautious about the dollar. Central banks worldwide "expect global reserves of gold to increase over the next year," said The Wall Street Journal, seeing the shiny metal as a safer bet to store funds. "Extraordinary market pressure, unprecedented economic uncertainty and political upheavals around the world have kept gold front of mind for central banks," said an official at the World Gold Council.Â
When investors move away from the dollar, it's usually to "nontraditional reserve currencies, including the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singaporean dollar and Nordic currencies," said economists at the International Monetary Fund. If the dollar does lose its dominance, it probably won't happen overnight. Instead, it will be a "very gradual" process that gives way to a "rising role for the nontraditional currencies of small, open, well-managed economies." |