The Maryland Tech Council’s Member Point of View blog gives members a new way to share their insights on innovation, markets, and the economy. 

This week’s guest blog comes from Sebnem Kalemli-Ozcan, Neil Moskowitz Professor of Economics at the University of Maryland, and explores whether the conflict in Ukraine impacts the US dollar’s future as the world’s reserve currency.

 

Is the US Dollar’s Global Hegemony at Risk?

Şebnem Kalemli-Özcan

The economic sanctions imposed by Western countries on Russia following its invasion of Ukraine include weaponization of the US dollar, seemingly calling into question the greenback’s global hegemony. But, in the absence of viable alternatives, the dollar is unlikely to be dethroned any time soon.

An alternative hegemonic currency should have as large a role in world trade and finance as the dollar currently does. The euro and the renminbi are important trading currencies, but they have a smaller footprint in global finance. The strong spillovers to emerging markets from US monetary policy – but not from monetary policies in other advanced economies – are a clear indication of the role played by the dollar in global capital flows.

The alternative should also be a safe asset, so that central banks are willing to hold their reserves in bonds denominated in that currency. Currently, central banks hold most of their reserves in US dollars, followed by the euro. Thus, euro is a viable alternative, though I doubt that euro can topple the dollar to become the next reserve currency. Even though the euro is a safe asset, the absence of a Europe-wide government limits the issuance of euro-denominated government bonds, relative to US treasuries.

The renminbi is not a contender for this role either, as it is neither fully convertible nor backed by democratic institutions and the rule of law. Chinese capital controls currently make it practically impossible for the renminbi to play a larger role in global capital flows and serve as a reserve currency.

Yet, having watched Russia’s central bank being cut off from its dollar reserves, many countries now have a desire to diminish the dollar’s outsize role. In principle, any currency can be used as a weapon. And the most damaging weapons of all would be those of autocratic governments.