Former US secretary of the Treasury Paul O’Neill said that if the US ever dropped the strong-dollar policy, he would hire a brass band at Yankee Stadium to mark the proclamation. O’Neill had reservations about the mantra, but ultimately fell into line. The musicians did not make it to rehearsal on his watch and Washington’s support for greenback primacy lived on, with the odd tweak every now and then.
Challenges to the dollar’s vital role in the world economic and financial system are often said to be, if not imminent, then over the horizon, but somehow they never quite materialize. Do not expect any of the current noise about movement toward a currency shared by the BRICS nations — Brazil, Russia, India, China and South Africa — to amount to much. If any of these were to be the foundation of a single unit of exchange, it would likely be China. Precedent is not encouraging: Seven years after the IMF added the Chinese yuan to its basket of reserve currencies, it accounts for a minute share of the global cache.
Nor should we be too impressed by the New Development Bank, a lender created by the quintet to become a counterweight to the IMF or World Bank, part of a journey by the Global South to some wonderland with minimal Western influence. Emerging markets chafe that an American gets to lead the World Bank and that a European helms the IMF. After all, the US is the biggest stakeholder in both organizations.
Illustration: Mountain People
Clickbait headlines aside, such initiatives say more about who is advancing them than the shortcomings of the greenback. Potshots that appeal to domestic audiences are no substitute for economic leadership. None of the pretenders appears remotely ready.
South Africa, the host of this week’s summit for BRICS leaders, has done its best in recent days to hose down some of the speculation about foreign exchange singularity. That is a long way off, officials say. The talks will focus on issues including the establishment of a common payments system, South Africa’s envoy to the group said last week. What is likely is the formation of a technical committee to start considering a potential joint currency. This takes some of the heat out of the notion of a plot to dethrone the dollar.
Why did the idea get so far? It is a distraction from difficulties faced by some of the five countries. Russia is isolated from respectable salons, and is raising interest rates to stem the ruble’s collapse while simultaneously financing its war against Ukraine. China’s economy is slackening after decades of meteoric growth. South African leaders are contending with their failure to live up to the early promise of the post-Apartheid years.
Among the ballyhooed threats to the dollar that petered out are the collapse of the gold standard, the advent of floating exchange rates, the US current-account deficit, budget shortfalls, the global financial crisis and China’s dizzying rise after Deng Xiaoping’s (鄧小平) reforms. The euro held some promise, but a sovereign debt crisis in the early 2010s stalled that ascent.
The metrics are familiar yet compelling enough to repeat. The greenback comprises just under 60 percent of global currency reserves, according to the IMF. That is down from about 70 percent in 2000, but still well above any competitor. The euro is next, with about 20 percent, followed by the yen and the British pound. The yuan has 2.6 percent of the total. In terms of trading, the US dollar appears almost untouchable, accounting for one side of 88 percent of all transactions in the US$7.5 trillion-a-day foreign exchange market.
Emerging-market central bankers tend to get defensive on this subject. They are often asked about their intentions in the context of what the US Federal Reserve is doing. They rightly insist that they do not have to simply follow the Fed’s lead. Do not miss the essential point though: Their actions do reflect the broad trajectory of US rates, if not the precise timing. Moreover, these bankers are often drawn into a perspective on the Fed at their monthly press conferences and seem very well informed. I am waiting for a similar dissertation on the People’s Bank of China.
South African Reserve Bank Governor Lesetja Kganyago, has correctly identified management of any currency as a definitive issue. Some monetary authority, somewhere, would have to call the shots. There was much horse trading about where the European Central Bank (ECB) would be headquartered, who would lead it and how would it be run. At the time, many leaders feared German dominance. The bank is headquartered in Frankfurt, but a German has yet to run the ECB. Two of its four presidents have been French.
For the BRICS, which do not share the EU’s sense of purpose in pursuing integration, the hurdles are legion, but will it be a no-show forever? As natural as the ECB and euro now look, the path was far from smooth and only really got a head of steam once the Berlin Wall came down and Germany was reunited. Nor was the Fed always a sure thing.
A central bank that resembled those in Europe was long anathema to large sections of the US political class. The idea of an institution dominated by Wall Street and business elites on the US’ east coast met fierce resistance from heartland populists, as Roger Lowenstein wrote in his 2015 book America’s Bank, which chronicled the creation of the Fed. Yet the US needed a currency and an institution backing it that reflected the country’s growing commercial heft. Ultimately, it came together in 1913 as a messy compromise. Even today, differences arise between the district Fed banks and the Washington-based Board of Governors.
BRIC, the acronym devised in 2001 by Jim O’Neill, a former chief economist at Goldman Sachs, captured the mood of the time. China was going great guns after entry to the WTO. India’s ascent was under way after a financial crisis a decade earlier led to an opening up. Russian President Vladimir Putin was putting the economic collapse of the late 1990s behind him. The US slipped into recession, followed by a sluggish recovery, with confidence fragile after the Sept. 11, 2001 terrorist attacks in the US. South Africa was added to the group later.
Too bad the countries themselves have let it go to their heads.
Daniel Moss is a Bloomberg columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for economics. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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