Freeze on Russian Reserves Domino That May Topple Dollar’s World Reserve Status, German Media Warns
11:46 GMT 16.03.2022 (Updated: 13:36 GMT 06.08.2022)
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With a national debt of over $30 trillion, a skyrocketing consumer price index thanks to trillions in new government spending, and renewed efforts by emerging economies to find alternative means of exchange in foreign trade, the greenback’s time in the sun as a harbour of stability in uncertain times could be coming to an end.
The dollar may lose its status as the de facto world reserve currency thanks to inflation, the fragmentation of the globalised economy and, fatefully, the new US and Western sanctions slapped on Russia targeting its foreign reserves, Spiegel contributor Henrik Muller argues.
“There are now some signs that the dollar’s dominance may be coming to an end,” the observer wrote, pointing, for example, to the corrosive role of inflation, which surged to a whopping 10 percent in February, according to fresh US Department of Labor statistics.
“Inflation can cause lasting damage to international confidence in the value of the dollar,” Muller explained. “Ultimately, the financing of the entire US economy depends on the status of the dollar. The United States is able to run current account and budget deficits in the long term, and that means living structurally beyond its means – because half the world is willing to lend America money at very low interest rates,” Muller stressed.
The unprecedented step by the US and its allies of freezing about $300 billion in Russian foreign reserves abroad in response to Moscow’s military operation in Ukraine is another major warning sign, the observer noted. “The sharpest weapon in the arsenal of sanctions against Russia was the freezing of Moscow’s currency reserves in other central banks, a step which had never been taken in this form before. Should fears spread that the US government could confiscate currency assets at any time, this could cause massive damage to the dollar,” Muller added.
The observer suggested that for “countries with large currency reserves, the question arises as to whether their balances with the Fed (and other Western central banks participating in the sanctions) are still safe…The country with by far the largest forex reserves is China. The Saudis and other Gulf emirates also have substantial dollar holdings.”
15 March 2022, 20:19 GMT
Finally, the observer noted, the crisis in Ukraine is rapidly changing the balance of power in the financial markets, leading to the formation or strengthening of new blocs of sovereign powers with fragmented financial markets replacing US-dominated global financial institutions. These tectonic shifts are likely to impact the forex market, and the dollar’s strength, accordingly, he added.
Muller pointed to the Soviet experience of the convertible ruble zone within the Council for Mutual Economic Assistance (Comecon) bloc as an example of one possible vision of things to come, saying it appears that the People’s Republic of China is already “on its way to establishing its own” economic bloc.
For fairness sake, the observer admitted that discussions about the imminent decline of the dollar have been taking place for decades, starting with the collapse of the Bretton Woods system in the early 1970s, when the greenback lost its gold-backed status. Since then, the US currency has weathered a series of crises. Not even the US’s transformation in the 1980s from a net creditor into a net debtor nation managed to alter this state of affairs.
13 March 2022, 18:11 GMT
Today, Muller noted, America’s money still accounts for about 60 percent of global currency reserves and outstanding international debt, 55 percent of cross-border bank credit, and over 40 percent of foreign exchange and trade transactions.
“Once a monetary standard has been established, it is not easy to replace it with a new one. Such a chance happens only once every few generations – most recently after the First World War, when the British pound gradually lost its dominant international role. The decline of the pound as world money was preceded by a long relative decline of the British Empire. Other powers caught up economically and militarily, notably the United States and Germany. But the pound and the financial centre of London remained the financial centre of the world for quite some time,” Muller wrote.
The same may be true of the US dollar today is the implication. The currency has already fallen behind the European Union and China in total trade volume, while central banks have moved to diversify their dollar holdings by moving to other assets.
“So far, the dollar has benefited from the fact that there are no real alternatives; the euro lacks an institutional foundation. Gold lacks liquidity; the renminbi is not even convertible…Cryptocurrencies are only a theoretical option because they lack the ‘soul of money’...i.e. the trustworthiness of state institutions. But digital currencies are developing quickly, also driven by central banks themselves. These are innovations that can completely change the monetary system,” Muller stressed.
