Donald Trump\u2019s attack on Iran, with its puerile Pentagon nametag Operation Epic Fury, is another show of violent force from a bullish administration.<\/p>\n
Aside from unleashing fresh instability across the Middle East, the strikes add to the sense of a US operating with little regard for international law or global norms \u2013 as with Trump\u2019s on-off tariff regime, and the attack on Venezuela.<\/p>\n
In the financial sphere, that is only likely to add weight to an incremental but historic shift away from the global dominance of the US currency and towards a more complex world that may be less to Washington\u2019s liking.<\/p>\n
The trade-weighted dollar, measured against a basket of global currencies, has lost 7% of its value<\/a> over the past year despite strong US economic growth and soaring stock prices on Wall Street. That partly reflects the outlook for inflation, and therefore interest rates, but also perhaps a more nebulous sense that the US policy framework is not as solid and predictable as it may once have been.<\/p>\n As panellists concluded at a conference in London last week convened by the Centre for Inclusive Trade Policy, what appears likely is not that one currency will supplant the dollar, as the dollar abruptly replaced sterling after the second world war, but that a more complex, multipolar system will emerge.<\/p>\n International trade is still overwhelmingly denominated by the greenback, although the use of China\u2019s renminbi is rising \u2013 a phenomenon actively facilitated by Beijing.<\/p>\n But when it comes to foreign currency reserves, global central banks have been quietly and gradually moving towards alternatives, with the share held in dollars slipping from 71% in 2001 to 57% by the final quarter of last year.<\/p>\n The seeds were sown long ago. The US Federal Reserve rode to the rescue of the global financial system at the height of the credit crisis in 2007-08 by opening up swap lines to handpicked countries, allowing central banks to exchange their own currency for desperately needed dollars.<\/p>\n The move was widely welcomed, in effect saving the offshore dollar system, but it laid bare the immense leverage the US has as a result of its currency being the lifeblood of the world economy.<\/p>\n Meanwhile, the increasing use of economic sanctions as a geopolitical weapon \u2013 including freezing offshore assets, and cutting off access to the Swift international payment system<\/a> \u2013 has underlined the risks of what the US academics Henry Farrell and Abraham Newman have called \u201cweaponised interdependence\u201d<\/a>.<\/p>\n