Sansad TV Perspective: Dollar Dominance: Under Threat?

In the series Sansad TV Perspective, we bring you an analysis of the discussion featured on the insightful programme ‘Perspective’ on Sansad TV, on various important topics affecting India and also the world. This analysis will help you immensely for the IAS exam, especially the mains exam, where a well-rounded understanding of topics is a prerequisite for writing answers that fetch good marks.

In this article, we feature the discussion on the topic: Dollar Dominance: Under Threat?

Anchor:– Teena Jha

Participants: 

1. Arvind Panagariya, Professor of Economics, Columbia University
2. Subhomoy Bhattacharjee, Consulting Editor, Business Standard
3. Dr. Arvind Virmani, Chairman, EGROW Foundation

Context: 

The aftermaths of the Ukraine-Russia conflict have extended to the shores of the global economy contributing enormously to a major crisis. With the emerging geopolitical tensions, the dollar dominance has been under significant risk which has grabbed the attention of several debates and is in need of effective interventions. 

What is happening at present?

• The Russia-Ukraine conflict conveys no signal of coming to an end or any tendency towards a peaceful settlement. 
• This has disrupted the global supply chain and has caused a major blow to the global economy. 
• The World Bank has reduced its annual global growth forecast for 2022 by nearly a full percentage point, from 4.1% down to 3.2%. It has cited the pressure that Russia’s invasion of Ukraine has placed on the global economy. 
• The financial sanctions imposed on Russia by the major Western powers have prompted changes in the international financial order driving significant changes in the international monetary system and global financial landscape. 
• This can fragment the international monetary system further as an outcome of sanctions imposed on Russia that threaten to dilute the dollar dominance. This was put forth by the Deputy Managing Director of the International Monetary Fund (IMF). 

The dominance of the US dollar in trade and finance:

• The dominant currency paradigm represents a unique economic model that takes into account that the prices in global trade are predominantly not set in either the producer’s or destination’s currency but are set in dollars. 
• Economists inferred that most of the transactions are dollar-dominated, currency depreciation is rather unlikely to increase exports. 
• A depreciation in the currency relative to the dollar leads to an increase in the price of imported goods which means high pressures on inflation. 
• The dollar’s role as the world’s “reserve currency” is a cornerstone of the global economy and global finance as well as geopolitics. 

The dollar dominance: Knowing the background

• The dollar’s rise to global hegemony is the story of the early 20th century and gathered momentum at the conference of Bretton Woods that formulated the postwar monetary order in 1944. 
• After this, the dollar reflected its dominance in global finance, trade and banking and nearly all foreign currency reserves were held in dollars. 
• Over the years, the US dollar has determined resilience even at times of significant challenges wherein the inflation rose to double-digit rates in the 1970s. 
• Despite the challenges faced by the US economy due to fiscal and external deficits of the 1980s, the dollar’s share of global reserves remained steady and reserves even grew as time progressed. 
• In the 1990s the dollar’s role started diminishing and the US became a net debtor to the world. 
• With the emerging global value chains, China’s integration into the world economy has been an impediment to the economic growth of the US. 

The Declining Dollars: Challenges

• Too much money is printed along with high debt rates that have contributed to threatening the dollar dominance. 
• Strong global competitions have also created challenges for the dollar to continue its dominance. 
• A considerable decline in the dollar’s share can be attributed to the greater use of the Chinese renminbi. 
• It was notified by the IMF official that the dollar’s share of international reserves had fallen from 70% to 60% over a period of time with the growing trading currencies led by the Australian dollar.
• The IMF, in its observation, conveyed that the international monetary system is evolving with alternate currencies gathering prominence such as the Canadian dollar, Singapore dollar, Korean won, Swedish Krona, Australian dollar and Chinese renminbi.

What is predicted?

• The dominance of the dollar is backed by strong and highly credible institutions, deep markets and the fact that it is freely convertible. 
• Therefore, the dollar dominance is unlikely to be challenged in the middle term according to the experts. 
• Some experts also advocate that Russia’s threat to the dollar hegemony will remain a fantasy. 
• It is predicted that the sanctions against Russia will not foreshadow the decline of the dollar as the reserve currency and the Russia-Ukraine Conflict will slow down the global economy but will not cause a global recession.

Read more summaries of Perspective in the link.

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