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24 October 2022

“America makes up a little over 20 per cent of the world economy, but through good times and crises, the US dollar remains king of the currencies.” – says Professor Adam Tooze, historian from Columbia University

Let’s start with a few interesting questions to ponder:

How does an inherently unstable system endure every crisis, whose emergence from 1916 was opposed, and whose ending was repeatedly predicted? What is the secret that holds the dollar system together?

The US Dollar rules

It is repeatedly stated that the dollar wins whatever the state of the world economy. It is increasingly hard to ignore how the dollar’s economic pre-eminence is out of proportion to America’s financial standing. This year the strength of the US currency has humbled the yen, the euro and the pound sterling. US interest rates are putting pressure on dollar debtors around the world. Almost every asset class has seen tragic returns except the US dollar. The dollar’s power is even more pronounced compared to the inferior performance of stocks, bonds, and most cryptocurrencies. Its stake in currency reserves is closer to 60 per cent, and the dollar is involved in 85% of all foreign trades.

The dollar’s continued strength also tells us about the US economy’s prospects, especially if it is compared to Europe’s, which is currently in the midst of war and already likely in recession.

Meanwhile, the load of geopolitical troubles is overwhelming the global economy. For example, China’s zero Covid policy and bursting real estate bubble have pushed investors to safe-haven assets. The US dollar is a haven in crisis; in a boom, money surges into the dollar because US business is the prime generator of profits. As a result, it is causing the greenback to be one of the safest stakes around.

The century of the dollar

According to the New Statesman and an article in the AFR, at the start of 2022 economists debated the possibility of a Sino-Russian axis (with India as a potential third member) and a new currency system based on commodities such as oil, wheat or minerals. Cryptocurrencies were touted as the unpolitical, private alternative.

Such speculation has faded, and the exchange rate of the US currency is once more a dominant force in the world economy. As a result, talk of alternatives to the dollar seems like an exercise in wishful or alarmist thinking. A sign of unease with an unbalanced world rather than a realistic analysis of likely macroeconomic trends.

The century of dollar dominance has always been marked by controversy. The dollar emerged as the world currency due to the First and Second World Wars.

The Federal Reserve

The Federal Reserve is also the most powerful central bank globally and still functions as the de facto central bank. Moreover, it has been even more aggressive recently, raising the benchmark rate in the world’s largest economy to the current 3.25%. One of the side effects of the aggressive Fed tightening has been a strengthening of the US dollar against most other global currencies, which caused the increase seen lately in the Qoin value.

The greenback has also gained amid rising geopolitical uncertainties due to its haven status. Consequently, the Australian dollar value slipped from 76 U.S cents in early April to just under 64 U.S cents – a decline of 16% in 6 months.

Some good news for Aussie crypto investors selling their holdings in a volatile public market for U.S dollars is they will receive a welcome foreign exchange boost.

Kindleberger’s basic secret ingredient

The resilience of the dollar system lies not in the robust health of the U.S national economy or its national politics but in the strength of a global financial network woven in dollars and the willingness of the Fed to support that network as a lender of last resort.

This remains the central insight today – when the world economy is evaluated and concluded that the dollar’s role in global finance is disproportionate to its share of global GDP. America’s trade deficit is unsustainable, congressional politics is a mess, and presidential leadership is dangerously erratic. We are conflating two fundamentally incommensurate visions of the world economy: the one cosmopolitan, the other national or international.

The dollar’s resilience is pre-eminently the effect of a cosmopolitan power structure. As economist Perry Mehrling writes, “while the United States may well have become unable to lead, the global dollar system not only survives but expands. As private actors find ways through derivative trades to insulate themselves against national shocks, the network of central banks centred on the Fed finds new instruments “to put a floor underneath the muddle”.

Kindleberger was an economist at odds with his times for much of his working life. As a result, Kindleberger is thought of less as an international economist than a cosmopolitan economic thinker. 

Three years ago 

The Association considered most of the above reasons at the start of the Qoin project when the U.S. Dollar was selected as the base rate for the token’s value algorithm. The U.S. monetary policy is the most influential power forcing the dollar up against other major currencies. And so, as markets panic, investors flee to security. As a result, the dollar and, subsequently, the Qoin value benefits.