The dollar's dominance faces several non-economic threats amid a more fragmented global system, says Mohamed El-Erian
- The dollar will remain dominant on the world stage, Mohamed El-Erian wrote in the Financial Times.
- But several non-economic threats could challenge the dollar's status, he warned.
The dollar is not at risk of losing its dominant status anytime soon, but threats are emerging, top economist Mohamed El-Erian wrote in The Financial Times.
No other currency, be it physical or virtual, can replace the dollar as the foundation of global finance, he said.
"However, the global influence of the dollar is facing several non-economic challenges, despite its continued status as the world's 'reserve currency,'" the chief economic adviser at Allianz warned. "This is a consequence of an increasingly fragmented international economic system. National security and geopolitics are supplanting economics in shaping national and international interactions."
Past events that could have unhinged the dollar's dominance — such as the global financial crisis and the trade wars of 2017 — failed to do so. Despite potentially disrupting the greenback's prestige, its strength still superseded that of other currencies, El-Erian said.
Today, however, shifts in the global order are bringing about a unique set of threats to the dollar.
He placed some of the responsibility on the Federal Reserve's "mishandling" of its monetary tightening campaign as well as greater focus on resilience in business and economic strategies.
"Rather than seeking to replace the dollar outright, there is now a step up in efforts to build pipes around it in the world's trading and payment infrastructures," he wrote.
For example, China has been on a campaign to chip away at the dollar's use in trade, creating bilateral agreements with countries to use the yuan instead.
Meanwhile, sanctions against Russia for its war on Ukraine have led many countries to start looking for ways to reduce their dollar dependence and are observing how Moscow has substituted the dollar in its own trade.
To strengthen the dollar, the US and its allies could revitalize multilateralism by guaranteeing more representation for geopolitically important states, El-Erian said. This includes redesigning the International Monetary Fund and World Bank to become more inclusive.
Another option is to "de-risk" instead of "decouple," though that would fail to offer stability and would do little to strengthen a weakening multilateral order, he noted.
"From an economic perspective, a more inclusive multilateralism supported by a robust rule-based system undoubtedly offers greater benefits compared with the alternatives," he wrote. "However, it is increasingly evident that economics no longer holds the reins in driving the process of trade and international finance."
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