European policymakers have woken up to these developments. There have been a series of calls in recent months for the euro to assume a stronger international role.
The main reason that I see for these calls relates to the growing perception of a shift in global governance, from leadership built on trust and common identities—what the ancient Greeks called hegemonia—to leadership based on arkhe, hard power where policies and doctrines are imposed on others [emphasis added].
In such an environment, being the issuer of a global reserve currency confers international monetary power, in particular the capacity to “weaponise” access to the financial and payments systems [emphasis added]. As has been clear on a number of recent occasions, the prospect of being shut out of major financial systems makes fines or economic sanctions markedly more threatening.
This shift in global governance, in turn, has contributed to the belief that the EU may be more exposed to the risk that the monetary power of others is not used in its best interests, or is even used against it.
— Speech by Benoît Cœuré, member of the executive board of the ECB, at the Council on Foreign Relations, New York City, 15 February 2019
One question that seems to be repeatedly on investors’ minds is the status of the U.S. dollar and whether or not it will continue to be the global reserve currency of choice. Many investors are concerned that recent geopolitical and financial market developments suggest we are now much closer to the ultimate breakup of the dollar as the world’s reserve currency of choice.
In this Economics Weekly, we look at the dollar de-globalization dilemma, with the view that while the dollar's status will not last forever, there are still few viable alternatives at the moment and it is unlikely we will be lamenting its demise anytime soon. We also examine some more realistic explanations for the decline of its share of global reserves.
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Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.