The Future of the Dollar—and Its Role in Financial Diplomacy - The National Interest

If the military strength and economic wealth of the United States underpin the dollar’s central role, then America’s global influence is enhanced because its currency dominates trade, finance and sovereign reserves.

THE DOLLAR’S central role in world financial markets reflects both faith in American leadership and the absence of reasonable alternatives. Currency dominance has also been a linchpin in America’s efforts to shape a global order around free markets and democracy while serving as a foundation for the sustained growth of a more integrated global economy. These roles now face rising risks. Both Republicans and Democrats question the benefits of an open and integrated economic order that seems to drain good jobs and demand repeated bailouts of bad banks and corrupt foreign governments. Meanwhile, allies and rivals alike raise doubts about the durability of U.S. leadership and the wisdom of depending so heavily on one dominant power.

Such talk hardly portends imminent financial collapse or reconfiguration of the global order. America’s military and political strength remain paramount and investors still retreat to dollars whenever risks mount—even when those risks originate in the United States itself. Nevertheless, signs of an unravelling consensus are unmistakable. They lie not in the declining percentages of U.S. currency held in sovereign reserves, but rather the weakening faith in America’s ability to hold the system together. The clues are in the early elements of financial plumbing that bypass dollar markets, international financial institutions without active U.S. participation and increasingly rudderless economic gatherings of finance ministers. The risks for the existing global order are not that another power will displace Washington on these issues, but that there will be no leadership in areas that have become increasingly important to global commerce. Worse, the response to the next financial crisis will be uncoordinated and disastrous.

The U.S. midterm elections have triggered some renewed debate about America’s global agenda, yet there have been few voices to remind voters that international financial leadership benefits Americans and not just America’s banks. In fact, global dependence on access to the dollar gives Washington leverage to coordinate battles against terrorism and cybercrime, to shape rules against corruption and tax avoidance, and to protect privacy through the regulation of global data flows that will drive the next decades of economic innovation. Meanwhile, the United States must also build on summit communiques to make concrete progress in these areas with skeptical allies and rivals. For all its fits and starts, U.S. leadership continues to provide a crucial global framework for strong, sustainable and balanced growth. Yet faith in the dollar will only endure with a sense that the United States’ role has evolved from chief executive to managing partner that champions the integrity of a global financial system along with its own interests. - Read More
The Future of the Dollar—and Its Role in Financial Diplomacy