The Oliver Wyman Forum recently convened senior leaders at the United Kingdom’s House of Lords for a discussion on the outlook for the dollar, and whether it would remain at the center of the global financial system. Financial Times columnist Martin Wolf and Harvard professor and former International Monetary Fund chief economist Kenneth Rogoff discussed the potential impact of a change in the dollar’s status on governments, business, and consumers around the world. Here are some of the key takeaways:
The dollar faces real risks to its value and supremacy in the financial system, and not just because of trade policy. The United States has raised tariffs to the highest levels in over a century, sparking turbulence in financial markets and raising fears about higher inflation and reduced economic growth. The sweeping nature of the tariffs has undermined trust in the US, Rogoff contended, while the president’s criticism of Federal Reserve Chair Jerome Powell has raised concerns about the central bank’s independence. These and other factors have combined to cause “the biggest shock” since Richard Nixon took the US off the gold standard in 1971, he said.
The US currency also has underlying weaknesses that have been festering for years. Federal debt surged by 16 percentage points during the last five years, to nearly 122% of gross domestic product, while relatively high interest rates raise questions about the sustainability of that debt – not least among foreign countries that are big holders of US Treasury securities. At the same time, Washington’s repeated use of the dollar-based global payments system to impose sanctions on countries has spurred China to develop its own international payments network. In his latest book, “Our Dollar, Your Problem,” Rogoff contended that the dollar’s overall status probably peaked a decade ago.
We may be heading into a more unstable, multipolar economic and financial order. The dollar remains the dominant reserve currency even as its share of the world’s official reserves has fallen to below 58% from over 65% a decade ago. The euro and the Chinese yuan have made only marginal gains so far but they are likely to increase their influence, Rogoff argued, including in financial markets and in pricing trade. A more fragmented financial order may be more volatile and prone to crisis, Rogoff said, “more like the ‘70s.”
The price of losing dollar hegemony could be steep for the United States. Reduced demand for dollar-denominated assets would make it harder for Washington to finance its big debts and deficits, as well as the extended tax cuts that the administration aims to push through Congress later this year. Already, interest on the debt takes up more of the federal budget than defense spending. These growing imbalances increase the likelihood of higher inflation or financial repression, Rogoff said, adding, “This is all very bad for the US economy.”