The Bank for International Settlements is unconvinced that ending the dominance of the US dollar will protect the world economic order
Ending the dominance of the US dollar will not be enough to promote stability in the international monetary and financial system, a top official at the Bank for International Settlements has argued (BIS).
The BIS, often called the central bank for central banks, questioned the prevailing theory that when one currency becomes the world’s effective reserve currency – as the dollar has been for most of the 20th century – it creates inherent problems for the world’s financial order.
The dollar was the currency of choice in 87 per cent of global foreign exchange transactions, and accounted for 60 per cent of official foreign currency reserves – far ahead of the next most popular choice, the euro.
Read more: US GDP growth slowed dramatically in the first quarter of the year
Researchers did not deny that this “dominant role, coupled with the depth and breadth of US financial markets underpins the well documented asymmetric influence of US monetary and financial conditions on the rest of the world.”
However, Claudio Borio, head of the monetary and economic department at the BIS, said that reducing the strength of the dollar to have a more even spread of currencies take a leading role on the world stage would not, by itself, correct these problems.
Borio believes that the current system “amplifies the key weakness of domestic monetary and financial regimes – their inability to prevent the build-up and unwinding of hugely damaging financial imbalances.”
Read more: Germany's got mo money, does it have mo problems?
“Think of an elastic band that you can stretch out further and further but that, as a result, snaps back more violently,” he added.
“It is not clear to me that more pluralism is the answer to the main problem. True, it may impose greater discipline on the dominant country … but more pluralism, per se, does not address the root problem”.