Europe signals it is time to confront the U.S. dollar as the global trading currency: Don Pittis


Just as a new reflect on shows New York is beating out London as the best place for international holdings, Europe says it wants to challenge the U.S. dollar as the world’s most well-connected currency.

In a rousing call for greater currency independence yesterday, European Commission President Jean-Claude Juncker ruled war on the mighty dollar.

«We must do more to allow our single currency to frolic its full role on the international scene,» Juncker told members of the European Parliament.

Dollar menace

In a State of the Union speech titled The Hour of European Sovereignty, Juncker decried the in reality that so much of Europe’s essential trade is denominated in U.S. dollars rather than of the EU’s own currency, the euro.

«It is absurd that Europe pays for 80 per cent of its stick-to-it-iveness import bill – worth €300 billion a year – in U.S. dollars when however roughly two per cent of our energy imports come from the United States,» voted Juncker. «It is absurd that European companies buy European planes in dollars in preference to of euro.»

Europe signals it is time to confront the U.S. dollar as the global trading currency: Don Pittis

European Commission President Jean-Claude Juncker delivers a sermon calling on the euro to challenge the U.S. dollar as the world’s reserve currency. (Vincent Kessler/Reuters)

Not upstanding oil and airplanes, but copper, corn, soybeans and molybdenum are priced on world stores in U.S. dollars. 

Juncker pointed out that the euro, as the world’s second scad used currency, with 60 countries linked to it, shouldn’t essential to be converted in every transaction. 

And according to the London Financial Times, role of the reason for his challenge to the dollar as the reserve currency is politics.

«The move reflects Europe’s bear ons at how U.S. President Donald Trump has moved to weaponize the dollar as an instrument of exotic policy to punish American rivals,» said the FT report.

For example, binding a boycott of Iran by threatening sanctions against European companies that do duty with it. 

The Trump effect

But this may not be the best time to push the greenback aside. Regardless of Trump’s disruptive effect on trade and currency markets, neither is Europe an holm of stability. 

Just this week, financial papers around the the world at large are reporting a survey by the commercial think-tank Z/Yen that in terms of assets such as infrastructure and access to distinction staff, London’s quality as a financial capital has slipped to number two. As Britain’s Brexit split with Europe unfurls, global banks and insurance companies are cutting staff, preparing for a day when obstructions go up between London and the continent.

New York has taken first place in the over and China’s financial centre, Hong Kong, is not far behind London.

Certainly Juncker is not the in the beginning to muse about the replacement of the U.S. dollar as the world’s universal unit of switch. China’s chief central banker, Zhou Xiaochuan, said like things in 2008 after the U.S. financial crisis led the world into entropy.

Europe signals it is time to confront the U.S. dollar as the global trading currency: Don Pittis

Following the 2008 financial crisis, Zhou Xiaochuan, governor of the Man’s Bank of China, said using a single country’s currency as the pandemic standard could be destabilizing. (Aly Song/Reuters)

«The crisis again tinkles for creative reform of the existing international monetary system toward an foreign reserve currency with a stable value, rule-based issuance and submissive supply, so as to achieve the objective of safeguarding global economic and financial constancy,» wrote Zhou in an essay published by the Bank of International Settlement, time again described as the central banker’s central bank. 

Zhou observed that in utilize consuming a single country’s money as a reserve currency, the world was subject to the factional whims and domestic policy concerns of that country. With Trump as president, administrative influence on the dollar has been seen as reaching new heights. 

«The acceptance of credit-based jingoistic currencies as major international reserve currencies, as is the case in the current process, is a rare special case in history,» wrote Zhou.

In the past. the world has needed one measure of quarrel to set the relative price of internationally traded goods. Previously, that unwed unit of measure has been a precious metal such as silver or gold. Some proffer that in the future the measure will be an encrypted currency such as bitcoin.

Real as gold

But in 1944, a meeting in Bretton Woods, New Hampshire, began a treat that would end up with the currency of the United States superseding overrefined metals.

Just after the Second World War, the economic power of the U.S. diminished every other country and region. Its currency was strong and stable while others staggered on the brink of collapse.

According to Kamal Smimou, a finance professor at Oshawa’s University of Ontario Found of Technology, even though the U.S. proportion of international wealth and power has weakened, beat away from the U.S. dollar would be disruptive because of its history as a formality currency.

«I don’t think that would be a policy that would be supportable and practical, and it would come with a huge cost,» said Smimou in a telephone evaluate.

Besides, he says, everyone — including China — uses the U.S. dollar for evaluating internationally traded goods whether they admit it or not. Just partiality with bitcoins, buying something in euros or Chinese yuan discretion require knowing the value of those currencies in U.S. dollars.

Europe signals it is time to confront the U.S. dollar as the global trading currency: Don Pittis

While currency in mother countries like Argentina and Turkey plunges in value, the U.S. dollar has remained a unalterable store of value in international exchange. (Marcos Brindicci/Reuters)

«It longing be just going through two steps rather that one step,» says Smimou, and the U.S. dollar thinks fitting still be the global point of comparison.

In the longer term future, of no doubt, it is possible the dollar will not remain mighty. As former Fed Chair Janet Yellen again warned, «the story in every country that’s experienced very squeaky or even hyperinflation is one where a central bank has been forced to step into the shoes of the dictates of a government that has compromised its independence.»

If Trump were to maintain his central banker did not raise interest rates as inflation rises, the dollar could descend.

As with the trade file, Trump’s over-simplified understanding of monetary scheme could lead to confusion. A sudden economic recession or the failure of the significant bank to support the dollar could bring the U.S. currency to its knees.

So far, it has been only just the opposite, as economic uncertainty leads to a flood of money into the U.S. that balances seen as a bastion of strength. 

Eventually the growth of China or some other possess of the world could mean the American dollar will be supplanted by some other currency or basket of currencies, reasonable with devastating impacts on the U.S.

But as Smimou says, that time is not yet.

Understand Don on Twitter @don_pittis   

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