Trump's weaponisation of the dollar could threaten its dominance

The language of international monetary policy has turned militaristic. The phrase “currency war” has been popular for a decade and the US government’s more recent “weaponisation” of the dollar is generating controversy. But ironically, a martial approach could end up threatening the US currency’s global dominance.

This is a good time to gauge the relative strengths of the dollar and rival international currencies (meaning currencies that are used outside their home countries). In September the Bank for International Settlements released its triennial survey of turnover in global foreign-exchange markets. The International Monetary Fund’s statistics on central-bank holdings of foreign-exchange reserves have become much more reliable since China began reporting its holdings. And the Swift payments system issues monthly data on the use of major currencies in international transactions.

The bottom line is that the US dollar remains in first place by a wide margin, followed by the euro, the yen and the pound. Forty seven per cent of global payments are in dollars, compared with 31% in euros. Furthermore, 88% of foreign-exchange trading involves the dollar, almost three times the euro’s share (32%). And central banks hold 62% of their reserves in dollars, compared with only 20% in euros. The dollar also dominates on other measures of currency use in trade and finance.

As for China, the yuan is still in eighth place in terms of foreign-exchange market turnover. But it rose in August to fifth place in Swift payments, and, after leapfrogging the Canadian and Australian dollars, ranks fifth in central banks’ foreign-exchange reserves.

Predictions early in this decade that the yuan might challenge the dollar for the No 1 spot by 2020 clearly will not be