The US dollar 'exorbitant privilege' went to war and may be under assault
Received international monetary system challenged by quantitative easing, sanctions and geopolitical stakes
Few decades ago, the Washington consensus dreamed to restore a sort of British empire by using China and other developing countries as an unlimited reservoir of cheap and unprotected labor force... Legal, monetary and military dominance were expected maintaining this hegemonic global order... (See also)
That order appears to be fragilised at least... According to Zoltan Pozsar, the global head of short-term interest rate strategy at Credit Suisse:
Since the end of the cold war, the world has largely enjoyed a unipolar era — the US was the undisputed hegemon, globalisation was the economic order and the dollar was the currency of choice. But today, geopolitics once again pose a formidable set of challenges to the existing world order.
According to his analysis, the surviving US-Dollar Exchange Standard - disbanded since 1971 by the Nixon administration - is already confronted with two main challenges:
the spread of de-dollarisation efforts, including through
an emergent alternative use of USD reserves, away from recycling them into USD-denominated securities including Treasuries.
De-dollarisation has been triggered by the exceptional monetary (quantitative easing) and fiscal policies run by US FED and Treasury, and the use of USD-based international payment arrangements as a warfare instrument through sanctions. Recently, its pace appears to have accelerated.
Just only one illustrative example: the crude oil and natural gas markets. History told us the importance of all commodity contracts to be denominated in US dollar, the so-called petrodollars. According to Reuters, President Xi Jinping told Gulf Arab leaders last December 2022 that China would work to buy oil and gas in yuan, a move that would support Beijing's goal to establish its currency internationally and weaken the U.S. dollar's grip on world trade.
Under the USD-centered monetary order, the current account surpluses of creditor countries such as China, Russia and Saudi Arabia were largely being recycled into traditional reserve assets like US Treasuries. Such recycling uses to back and uphold the US Dollar ‘exorbitant privilege’ over international trade and finance. According to Pozsar, this recycling is not longer in place; instead, he writes
we have seen more demand for gold (see China’s recent purchases), commodities (see Saudi Arabia’s planned investments in mining interests) and geopolitical investments such as funding the BRI and helping allies and neighbours in need, like Turkey, Egypt or Pakistan. Leftover surpluses are held increasingly in bank deposits in liquid form to retain much-needed options in a changing world. In finance, everything is about marginal flows. These matter the most for the largest marginal borrower — the US Treasury. If less trade is invoiced in US dollars and there is a dwindling recycling of dollar surpluses into traditional reserve assets such as [US] Treasuries, the “exorbitant privilege” that the dollar holds as the international reserve currency could be under assault.
This alternative use of US reserves may accelerate de-dollarisation, since it does not longer fund US public debt and it does not longer pass through US financial institutions… It has been creating a sort of Asia-dollar system (for whom remembering the eurodollars of some decades ago).
Thanks to alternative international payment arrangements including cross-border central bank digital currencies (C-CBDC), it may develop into an alternative cross-border monetary order.