By Paola Subacchi<\/p>\n
US President Donald Trump\u2019s relentless attacks on Federal Reserve Chair Jerome Powell, together with his destabilizing foreign policy \u2013 notably the seizure of Venezuelan President Nicol\u00e1s Maduro and subsequent threats to bomb Iran and invade Greenland \u2013 have called into question the entire postwar international order, including the dominance of the dollar. There has never been a more appropriate moment to reflect on the dynamics that have kept the international monetary system relatively stable over the past half-century.<\/p>\n
Stability has persisted despite a fundamental asymmetry inherent in the dollar\u2019s role as a global reserve currency: to supply the world with dollar liquidity, the United States must run a current-account deficit, buying more from abroad than it sells. At the same time, it issues debt that foreign governments and investors are willing to use as a reserve asset.<\/p>\n
As a result, US borrowing costs have remained consistently low, enabling the federal government to expand its fiscal space on the back of foreign savings. This is what France\u2019s then-finance minister Val\u00e9ry Giscard d\u2019Estaing had in mind when he famously complained in the 1960s about the dollar\u2019s \u201cexorbitant privilege.\u201d<\/p>\n
He was not wrong. As former People\u2019s Bank of China Governor Zhou Xiaochuan\u00a0observed<\/a>\u00a0in the aftermath of the 2008 financial crisis, global monetary stability depends on a currency issued by a sovereign state whose policies are ultimately driven by domestic priorities. The spillovers from Trump\u2019s \u201cAmerica First\u201d policies illustrate what happens when those priorities diverge from the interests of the rest of the world.<\/p>\n In 2009, Zhou proposed exploring a global currency decoupled from the domestic concerns of any single issuer. At the same time, he began promoting the renminbi\u2019s internationalization. Until then, China \u2013 the world\u2019s largest exporter \u2013 had relied almost entirely on the dollar to invoice and settle its external trade. That dependence led to a massive buildup of dollar reserves, which\u00a0peaked at $3.8 trillion<\/a>\u00a0in 2014.<\/p>\n Reducing reliance on the dollar and diversifying away from a single reserve asset made sense for China then, and it still does. As a large, export-driven economy, China assumes persistent risks by effectively outsourcing its payments system and savings to the US. That helps explain why Chinese holdings of US federal debt have fallen to about\u00a0$700 billion<\/a>\u00a0from roughly\u00a0$1.3 trillion in 2015<\/a>.<\/p>\n Concerns about global imbalances \u2013 now back on the G7\u2019s agenda under France\u2019s leadership \u2013 are hardly new. They featured prominently in G20 discussions in the early 2010s, when Chinese policymakers saw a more balanced international monetary system as one that would spread adjustment burdens more evenly, reduce China\u2019s reliance on the dollar, and offer greater choice in payments and investments, thereby enhancing stability. The underlying rationale was straightforward: a systemically important economy like China should have a genuinely international currency.<\/p>\n Crucially, this vision rested on post-crisis policy cooperation through the G20. It was supported by multilateral financial institutions, particularly the International Monetary Fund, which encouraged the renminbi\u2019s internationalization as a way to integrate China more fully into the global economy.<\/p>\n The 2016 addition of the renminbi to the basket of currencies that comprise special drawing rights (the IMF\u2019s reserve asset) was seen as a step toward a multicurrency monetary system. During China\u2019s G20 presidency in 2016, such a shift was widely regarded as beneficial not only for China but also for global stability.<\/p>\n