Dollar reigns supreme during virus crisis
US currency’s strength holds China’s aspirations at bay
For all the human and economic damage it has wreaked on the U.S., the coronavirus crisis has reinforced the most important vestige of American power in the global economy: the supremacy of the dollar.
The U.S. moved quickly to help foreigners get dollars when markets started seizing up in March. In contrast to a previous tendency to emphasize negatives of a strong exchange rate, President Donald Trump has highlighted positives of overseas demand.
Beijing, meantime, has been noticeably silent on any criticism of the dollar’s outsize role in the world — in contrast with the aftermath of the Lehman Bros. meltdown in 2008 when China’s central bank governor called for the adoption of a global currency to displace the dollar’s dominance.
“The Fed has signaled the importance of keeping dollar liquidity in international markets” through moves to expand swap lines with emerging markets, said Paola Subacchi, author of “The People’s Money: How China is building a global currency” and a University of Bologna professor. “The question of the yuan competing head to head with the dollar could have some traction about eight years ago, but it is no longer the case.”
The numbers tell the tale. The dollar is used in 88% of all currency trades, according to the latest triennial Bank for International Settlements survey. It accounts for 61% of the world’s foreignexchange reserves, IMF data show. And the greenback has a 44% share of payments over the Swift global system, well in excess of the U.S. share of world
GDP, at about one-quarter.
The Federal Reserve has made it easier for other central banks to get dollar cash by letting them swap their Treasuries holdings. The decisions stood out because some American legislators had criticized the Fed for providing dollars to foreign central banks after the global financial crisis.
While Trump on April 17 noted the damage to exporters of a strong dollar, he also extolled the value of foreign capital. “Everybody wants to invest in our country,” and “people want the safety of our country,” he said.
“The Fed’s activism and Trump’s flip on a strong dollar reflect U.S. anxiety in the face of the narrative that China will emerge from the pandemic as the new world leader,” said Hui Feng, a senior research fellow at Australia’s Griffith Asia Institute.
Even as China opens its giant bond and stock markets to overseas investors, the existence of capital controls makes some fund managers wary.
“China is too early in its transition to a more market-driven economy to jump to a currency leadership position,” said Kathy Walsh, a finance professor at UTS Business School in Sydney who specializes in capital-markets research.