BANGLADESH UNIVERSITY OF PROFESSIONALS

Mirpur Cantonment, Dhaka- 1216

Faculty of Security and Strategic Studies (FSSS)
Course Name: Politics of International Economic Relations
Course Code: IR-4837

Submitted To
Meherun Nesa
Assistant Professor
Department of International Relations
Bangladesh University of Professionals

Submitted By: Group-A9

Farzana Farin ID: 19411005
Jakia Sultana ID: 19411007
Tasmim Akter ID: 19411017
Md. Raffat Rahman ID: 19411079
Section: A; Batch: 2019

Submission Date: 29 September 2022

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Monetary Hegemony: Global Dominance of US Dollar

Monetary hegemony as a term first appeared in Michael Hudson’s book “Super

Imperialism: The Origin and Fundamentals of U.S. World Dominance”. He argued that
dollar has an asymmetric relationship to global economy and also this hegemonic structure is
supported by institutions like International monetary Fund and World Bank (Hudson,
2017). Despite being the global reserve currency, the US Dollar is currently under challenge
in the 21st century. It is in a position of contest due to certain factors such as the emerging
alternative currencies, the rising account deficit of America and political instability among
major trade partners of the globe. Despite the challenges in the contemporary international
political economy, US dollar continues to dominate as the global reserve currency.

In order for a currency to remain in its hegemonic position, it requires to have deep
and liquid bond markets, strong security in form of military and political backing in addition
to an independent central bank system. Historically, the USD has unequivocally possessed all
three of the factors in its own right. However, the economic playing field is shifting toward a
multipolar reign much like the international political scenario at present. The reasons of such
unsteadiness of the dollar hegemony, the causes of the shift and future prospects are thus
worthy of analyzing. Hence, a deep dive into the background of the dollar standard is
paramount to further discussion.

In the beginning of trade and commerce, primarily, the Spanish-American silver

dollar was used as the currency worldwide, especially in Europe, Asia, and America. The
abundant supply of silver in the 16th century, in Spanish America, factored in creating a
global silver standard currency system; the dominance lasted till the 19th century. Later on,
the emergence of the gold standard, internationally, the Spanish dollar was replaced by
sterling in the last quarter of the 19th century (Babones, 2017). Now, coming to the
emergence of dollar, the US dollar derived from the silver coin. But the Coinage Act-1792,
passed by the US Congress, paved the way for the US dollar to be the country's standard unit
of money. Moreover, since it emerged largely unharmed from World War I and the USA was
a big receiver of wartime gold inflows, gradually the US dollar began to supplant sterling as
the worldwide reserve currency in the 1920s (Eichengreen & Flandreau, 2008). Following
the USA's emergence as an even stronger global superpower during WWII, the Bretton
Woods Agreement of 1944 established the post-war international monetary system, with the
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US dollar rising to become the world's primary reserve currency for international trade and
the only post-war currency linked to gold at $35 per troy ounce (Amadeo, 2022).

With the emergence of many sovereign states, the world system is now of multipolar.
Yet, the world economy greatly depends on the US economy and its currency. However,
considering the periodic inflation and current Russia-Ukraine issue, although there is a lot of
discontent with the dollar standard, it is far less certain that this discontent will lead to real
reform. Some even think that the dollar's dominance at the top of the global currency pyramid
is likely to end. Whatever the assumptions are, the question remains- will the American dollar
lose its dominance as the gold standard of currency?

Helleiner and Kirshner gave two theoretical perspectives in response to this: one is an
instrumentalist perspective and the other is a geopolitical perspective. According to the
instrumentalist viewpoint, the dollar will continue to play a crucial role in international affairs
as long as other governments continue to find the dollar standard beneficial for achieving
important economic goals. The US is the greatest importer in the world, and many
governments, particularly in East Asia, have adopted export-oriented development policies,
in which demand from American consumers for Asian commodities drives growth. The
dollar's prominence as a currency reserve asset has therefore been furthered by pegs to the
dollar in favor of export-oriented development. Also, according to McKinnon, governments
peg their currencies to the dollar in order to maintain domestic pricing. And as long as
governments continue to believe that a peg to the dollar provides valuable support for their
export-oriented growth plan, the dollar will continue to be at the core of the international
monetary system (Oatley & Winecoff, 2014). Also, the viewpoint emphasizes how the
structure of financial intermediation between international capital markets and domestic
borrowers give emerging market nations tremendous incentives to peg to the dollar. On
international markets, emerging markets cannot borrow in their own currencies. Instead, they
must borrow it in dollar. Thus, instrumentalist viewpoints contend that the direction of US
economic hegemony is a key factor in the future of the dollar standard.

According to the geopolitical viewpoint, the dollar standard is based on a wider base of US
security-relevant power in the global system (Oatley & Winecoff, 2014). The readiness of
governments throughout the globe to acquire dollar-denominated assets as foreign exchange
reserves, as well as the rate at which the US issues dollar-denominated assets, reflects global
security imperatives.
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Since the Bretton Woods Agreement, countries started to reserve dollar as forex
reserve instead of gold. Countries started purchasing U.S. Treasury securities as they needed
a place to put their dollars and it was a secure place to keep their money. Despite stagflation,
which is characterized by high unemployment and rapid inflation, the dollar has continued to
be the world's highest reserve currency. If we analyze the present standard of world currency,
the dollar is remaining as the world’s highest reserve currency. According to the reports of
the International Monetary Fund IMF, at present central banks reserve around 59% of their
total reserve in U.S. dollars (Best, 2022). Foreign debt held in dollars is still increasing, with
levels about to reach $13.4 trillion USD by the middle of 2022.

The U.S. dollar as a global currency not only dominates the central reserves but also
the global trade, international assistance, international debt, and selling and purchasing of
goods worldwide are also conducted by the use of dollars. The USD or dollar is also
recognized as an official currency in several countries outside the United States of America
such as Zimbabwe, Timor-Leste the Turks and Caicos, El Salvador, Bonaire, the British
Virgin Islands, Micronesia, Palau, Panama, and the Marshall Islands are among the 11
nations that have made dollar as their official currency (Adkins, 2022). The dollar as an
international currency is still dominating several sectors of the world system and the
replacement of the dollar with any other currency remains a question of doubt at the present
context.

At present world, the U.S. dollar is holding a strong grip over the world currency
transition. The dominant role of the dollar as a global currency and in global trade is still at
the center of the world economic structure. Since dollar is the preserve currency and is used
to price most products and commodities worldwide, movements in other currencies have a
significant effect relative to the preserve currency. There are several reasons which make
U.S. dollar a dominant reserve system worldwide. About 84.9% of all transactions in foreign
exchange that happens daily are accounted by dollar even though the US only accounts for
15% of the global trade (Springthorpe, 2013). Around all intra-state transactions of goods,
whether it is Chilian exported wine sold to buyers of Japan or oil from OPEC states, is likely
to be completed in dollars. Due to the US Treasury's significant debt issuance, foreign central
banks can hold a large number of "risk-free" assets and Treasury Bills. Political stability in
the United States is another essential element. Given its long and impeccable record, US
Treasury Stock continues to command a high level of market confidence despite a recent
downgrade. Additionally, people who invest in other assets dominated by dollar can be sure
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that no US assets will probably be arbitrarily removed by the government or adversely

affected by unequally implemented laws. All these factors remain the position of the dollar as
global hegemony from both the political and economic context.

The contemporary Dollar Crisis is one that was initiated from the turn of the century
when the Euro currency system was created (Oatley & Winecoff, 2014). Despite its
domination of the global currency reserve and foreign exchange market, in recent times there
has been a rise in alternative currencies to the USD which are, in fact, far more challenging to
the Dollar system than the Euro. The Russian Ruble and Chinese Renminbi/ Yuan are prime
contenders in this regard. The digital currencies are also following suit at a steady but slower
pace, which leaves analysts to doubt their abilities to take over USD domination yet. In
addition to the rise in alternative currencies, there remains the impact of the 2008 Financial
Crisis which left a bitter taste in the global traders’ mouths and shifted their mindset to one of
dissatisfaction regarding American policies of trade and the dollar standard. Perhaps the most
impactful events that have led to the dollar crisis of 2022 are the COVID-19 Pandemic
followed by the Russia-Ukraine war.

This crisis has manifested itself in certain forms which include- the decrease of USD
shares in Global Foreign Exchange Reserves, the shifting of the central banks away from the
dollar and the new exchange rates causing devaluation of other currencies against a strong
dollar and a two track Sino-Russian strategy development to persuade investors away from
USD dependency. Owing to US sanctions and hostile financial policies toward Russia and
China respectively, the two states alliance has solidified into a strategy that targets all three of
the “Dollar Stronghold”. By this term, it is indicated the three major powers of the dollar- the
uncontended global currency reserve, the ability to purchase Saudi oil and the Petrodollar
scenario taking advantage of the SWIFT network. China has initiated the BRI project under
which it is indirectly controlling the financial decisions of several countries, lending them
huge loans which require payback in Yuan in exchange for a 1% interest discount (Think
School, 2022). About 165 nations are moving away from the dollar due to their previously
taken loans under the BRI initiative from China. Again, as Russia faced sanctions from the
US and was banned from the SWIFT network, they adopted a policy of supplying oil to
international buyers only in Ruble currency which led to the development of a new Petro-
Ruble scenario (Thomson, 2022). The impact of both of these strategies is evident when the
decline in USD reserves by central banks and the US dollar current account deficit growth is
observed. According to the IMF's COFER survey, the share of USD dollar reserves held by
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central banks has lowered to 59% which is the lowest in 25 years (Arslanalp & Simpson-
Bell, 2021). In this circumstance, the pressure to change policies is high especially from the
Global South.

There is a debate that exists among scholars on the potential decline of US dollar because
of the US global hegemony being challenged by the emerging economies as seen in the case
of BRICS countries. The future of US dollar as the global reserve currency may also be under
threat. From the point of view of economist Robert Triffin, a conflict of interest arises
between short term domestic and long-term international objectives for countries whose
currency acts as a global reserve currency. This phenomenon known as the ‘Triffin Paradox’
criticized the Bretton Woods systems (Triffin, 1960). The unrelenting demand for US dollars
created by the currency’s establishment as the global reserve has enabled the United States to
continue to accrue debt, largely without consequence. As the current system compels nations
to trade in US dollars, the United States has been free to run large budget deficits and balance
of payments deficits without any apparent impact on the United States (Thomas Costigan et
al., 2017).

Thus, theoretical viewpoints contend that the relative power of opposing forces will
determine whether the dollar standard survives. A future in which faith in the dollar dwindles
and nations become less prepared to pay costs to defend the dollar may very well emerge as a
result of a shifting global security environment and the US's broader economic collapse. But
the dollar's incumbency advantage mitigates these pressures as governments and market
participants continue to use the dollar because it helps them accomplish other goals and
because so many other governments and market participants do the same. Whichever of these
two forces prevails will ultimately determine the destiny of the dollar standard, at least in the
short term. (Oatley & Winecoff, 2014). The decline in the US dollar's role has not been
matched by an increase in the shares of the other traditional reserve currencies: the euro, yen,
and pound. Furthermore, while the proportion of reserves held in renminbi has increased, it
accounts for only one-quarter of the recent shift away from dollars, which is due in part to
China's relatively closed capital account. Furthermore, according to an update of data cited in
the working paper, as of the end of last year, a single country—Russia—held nearly a third of
the world's renminbi reserves. (Arslanalp et al., 2022).

In recent years, as seen in the data provided by IMF, nontraditional currencies have cut
quite a portion of the shares of US dollar in global foreign exchange reserves.
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Sources: Refinitiv. The index comprises the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss
franc weighted against the U.S. dollar.
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However, the U.S. dollar's value is at its highest point in a generation, weakening
currencies around the world and casting doubt on the future of the global economy as it
affects everything from the price of international travel to the success of multinational
corporations.

In all previous events, finding an acceptable alternative to the dollar standard proved to be
quite challenging against the backdrop of upsetting US policy. In addition to this, it was made
greater by the unwillingness of America to reach a consensus for any alternative. As a result,
despite international crisis and conflict the dollar standard kept repeating the cycle of revival.
The U.S. dollar has historically been a bedrock of the global economy and a reserve currency
for international trade and finance. Like any other dominant currency, the dollar's relative
value depends on the economic activity and outlook of the United States. In addition to
fundamentals and technical factors, market psychology and geopolitical risk also influence
the dollar's value on the world market.

References

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Arslanalp, S., Eichengreen, B., & Simpson-Bell, C. (2022, June 1). Dollar Dominance and
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