What Can Replace the Dollar?

by Barry Eichengreen, via Project Syndicate

BERKELEY – For more than a half-century, the US dollar has been not only America’s currency, but the world’s as well. It has been the dominant unit used in cross-border transactions and the principal asset held as reserves by central banks and governments. But, already before the recent debt-ceiling imbroglio, the dollar had begun to lose its luster. Its share in the identified foreign-exchange reserves of central banks, for example, had fallen to just over 60%, from 70% a decade ago.

The explanation is simple: the United States no longer dominates the world economy to the extent that it did in the past. It makes sense that the international monetary system should follow the global economy in becoming more multipolar. Just as the US now has to share the world stage with other economies, the dollar will have to make room for other international currencies. In my recent book Exorbitant Privilege: The Rise and Fall of the Dollar, I described a future in which the dollar and the euro would be the dominant global currencies. And, peering ten and more years down the road, I anticipated a potential international role for the Chinese renminbi.

I ruled out a role for Special Drawing Rights (SDRs), the accounting unit issued by the International Monetary Fund. One might think that the SDR, as a basket of four currencies, might be attractive to central banks and governments seeking to hedge their bets. But the process for issuing SDRs is cumbersome, and there are no private markets in which they can be traded. There was no realistic alternative, I concluded, to a future in which the leading national currencies, the dollar and the euro, still dominated international transactions. What’s different now is that a pox has been cast on both houses. The US debt-ceiling fiasco has raised doubts in the minds of central bankers about the advisability of holding dollars, while Europe’s failure to resolve its sovereign-debt crisis continues to fuel doubt that the euro can survive. Once upon a time (less than a year ago), it was possible to imagine international-reserve portfolios dominated by the dollar and euro; today, anxious central bankers are desperate for alternatives to both sick currencies.

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