The US dollar is tightening its grip on the global financial system at the expense of the euro, entrenching American hegemony and rendering the US Federal Reserve more powerful than at any time in history.
Newly-released data from the Bank for International Settlements (BIS) show that the dollar’s share of the $5.1 trillion in foreign exchange trades each day has continued rising to 87.6pc of all transactions.
It is the latest evidence confirming the extraordinary resilience of the dollar-based international order, confounding expectations of US financial decline a decade ago.
Roughly 60pc of the global economy is either in the dollar zone or closely tied to it through currency pegs or ‘dirty floats’, and the level of debt issued in dollars outside US jurisdiction has soared to $9 trillion.
This has profound implications for monetary policy. The Fed has become the world’s central bank whether it likes it or not, setting borrowing costs for much of the global system.
The BIS data shows that the volume of transactions in which the euro was on one side of the trade has slipped to 31.3pc from 37pc in 2007. The dollar share has ratcheted up to 87.6pc over the same period.
It is much the same picture for the foreign exchange reserves of central banks, a good barometer of global trust. The dollar share has recovered to 63.6pc, roughly where it was a decade ago.
The euro share has tumbled over the last eight years from 28pc to 20.4pc, and is barely above Deutsche Mark share in the early 1990s.
“There are no foreseeable rivals to the dollar as a viable reserve currency,” said Eswar Prasad from Cornell University, author of “The Dollar Trap: How the US Dollar Tightened Its Grip on Global Finance”.
“The US is hard to beat. The US has deep financial markets, a powerful central bank and legal framework the rest of the world has a great deal of trust in,” he said.
The eurozone is crippled by the lack of a unified EU treasury, joint bond issuance, and a genuine banking union to back up the currency. It would require a change in the German constitution to open the way for fiscal union, an unthinkable prospect in the current political climate....
The shale revolution in the US and the revival of its energy intensive industries have eliminated much of America’s current account deficit. The US Treasury’s draconian policies forced a quick clean-up of the US banking industry, in stark contrast to years of debilitating drift in Europe.
The 20pc surge in the dollar index since mid-2014 has silenced any serious talk of a dollar crisis, and revealed just how painful this can be for emerging markets. “The world is more reliant on the dollar than ever before. I don’t think people appreciate this enough,” said Stephen Jen from Eurizon SLJ Capital.
The Fed discovered to its horror with the first ‘taper tantrum’ in 2013 that mere hints of a rate rise could cause the global markets to seize up, in an experience repeated episodically ever since, with a fresh rout earlier this year after the first actual rate rise in December.
The Fed has backed off each time, afraid of its international shadow. “They won’t dare hit the brakes. They are trapped,” he said.