Discussions about the weakening of the US dollar's dominance worldwide are on the agenda. President Donald Trump's attempts to take away the independence of the Federal Reserve System and the tariff policy pursued against some of America's allies have raised questions about the future of the dollar.
Some believe that the decreasing confidence in governance in the US will push investors to abandon dollar-denominated assets, especially government bonds, and as a result, a new international currency system will be formed.
However, the United Kingdom's "Financial Times" newspaper writes that this approach does not reflect reality.
According to Medianews.az, in the article titled "Don't hope for the dollar to be dethroned" published in the newspaper on January 29, it is stated that the position of the US dollar is not only based on the argument of the absence of an alternative: "Its position in the global financial system is far stronger than we think.
Today, 56 percent of the foreign exchange reserves of the world's central banks consist of dollar assets. The share of the dollar in international trade, inter-country bank loans, and bond issuances is at a similar level. In foreign exchange markets, approximately 90 percent of transactions are carried out with the participation of the dollar. For example, those wishing to exchange Malaysian ringgit to Chilean pesos usually do not carry out this process directly, but first convert ringgit to dollars, then dollars to pesos."
The article further mentions that even these factors do not fully reflect the strength of the dollar: "There is a deeper factor: the currency swap market."
A financial swap means an agreement between two parties to exchange cash flows at future dates. The main purpose is to hedge risk. In a swap, parties temporarily exchange currency or interest payments. This mechanism is used to insure against exchange rate and interest rate risks.
A currency swap is the most widely used type of financial swaps. What is a currency swap? For example, a company has revenue in dollars but expenses in euros. The company agrees with the bank: it now exchanges dollars into euros, and after a certain period, it exchanges them back at a pre-agreed rate. Thus, even if the exchange rate changes, the company does not incur losses. Simply put, a currency swap is a risk hedging tool based on the "exchange now, return later" principle.
"Financial Times" writes that currency swaps play a big role in the global financial system and strengthen the dollar's position: "International banks, insurance and pension funds, and multinational companies use the currency swap mechanism to hedge currency risks.
According to data, the volume of open positions in the global swap market currently exceeds 100 trillion dollars. Ninety percent of that volume is tied to the dollar. It is extremely difficult to abandon this vast system and switch to another currency."
The article titled "Don't hope for the dollar to be dethroned" emphasizes that these facts weaken claims that the dollar will fall from the top of the global currency hierarchy in the near future: "No matter how dissatisfied the world is with the US, attempts at de-dollarization will face serious obstacles."
The article also recalls that there are opinions about the weakening of the US's ability to use the dollar as a sanctions tool: "This is not credible either. Sanctions work precisely because world banks are compelled to operate in dollars. The US can threaten to exclude any bank from the dollar system, and as long as the dollar maintains its primary role in international finance, this tool will not lose its effectiveness."
Regarding the risks associated with the economic course of the Trump administration, "Financial Times" notes that these risks are real: "The rapid growth of the federal debt and the weakening of the Federal Reserve System may result in investors mass-selling US bonds. If such a scenario occurs, the crisis could be quite painful because the dollar plays a central role worldwide. However, even if bonds are mass-sold, this does not mean that the US currency will be excluded from the global system or lose its role in the global system."
Thus, "Financial Times" writes that it is pointless to fall into the illusion that Washington's financial weapon (the dollar) will become obsolete: "The US dollar will remain the main currency in the world."
