Chinese and European aspirations to weaken the dominance of the US dollar as the global currency of choice have come to naught, with the latest global survey showing the greenback is on one side of 88% of all foreign currency transactions, an 18-year high.
The dollar’s ascendency gives the US administration an unrivalled ability to exercise coercion by imposing economic sanctions.
A new report by the United States Studies Centre’s Stephen Kirchner argues that the dominant role of the US dollar reflects the depth of US capital markets and the strength of US institutions and is likely to be long-lasting.
However, the paper warns that excessive use of economic sanctions will lead affected nations to develop workarounds.
The triennial survey of foreign exchange turnover conducted by the Bank for International Settlements showed the US dollar’s share had dropped to 84.9% at the beginning of the decade but has since gained ground at the expense of both the euro and the yen.
The euro was on one side of 32.3% of foreign exchange transactions this year, down from 39.0% in the 2010 survey, while the share of the yen dropped from 19.0% to 16.8%.
Only 4.3% of global foreign exchange deals involve China’s renminbi, significantly less than the 6.8% using the Australian dollar.
The foreign exchange market, which turns over US$6.6 trillion a day, is only one dimension of the US dollar’s dominance. It also accounts for 63% of outstanding debt securities (compared with 20% for the euro) and 40% of cross-border financial transactions.
The US dollar is used as the currency for invoicing more than three times as many global exports as America itself ships. About 70% of nations peg their own currencies in some way to the US dollar.
It is also the currency of choice for the world’s central banks, which use it for 62% of their foreign exchange reserves, although Kirchner argues that this status as a ‘reserve’ currency has little impact on the dollar’s ubiquitous use in global commerce. Rather it’s a reflection of the depth and liquidity of US capital markets and their supporting economic and political institutions.