A Critical Look at Dollar Dominance

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A Critical Look at Dollar Dominance

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Bibliographic details

• Authors: MOUHAMADOU SY
• Published: May 20, 2025

Main findings on dollar dominance and historical comparisons

• The dollar has remained central to the global economy despite searches for alternatives.
• Historical comparisons highlighted:
  • The Soviet ruble was never a serious competitor to the dollar.
  • The Japanese yen was at one point a serious rival, but the yen’s sharp appreciation after the 1985 Plaza Accord fueled a bubble in Japan’s stocks and real estate; by the time Japan recovered from the bursting of the bubble, the US and its dollar had forged ahead.
  • The euro is described as the world’s second-leading reserve currency but is used mostly for trade between European nations.
  • China’s bid to challenge dollar supremacy with the renminbi faces many obstacles.
• The dollar’s status confers an “exorbitant privilege,” as observed by Valéry Giscard d’Estaing in the 1960s, meaning the US can sell government debt at lower interest rates and run large current account deficits for decades without threatening its international investment position.

Author background and credibility

• Kenneth Rogoff’s credentials highlighted in the review:
  • Studied at the Massachusetts Institute of Technology in the late 1970s under Rüdiger Dornbusch.
  • Worked at the Federal Reserve’s international finance division in the early 1980s.
  • Served at the IMF as chief economist in the early 2000s.
  • Has taught in economics departments at several top US universities.

Policy prescriptions and historical policy lessons

• Rogoff’s policy recommendations emphasized in the review:
  • Call for flexible exchange rates paired with inflation targeting and independent central banks.
  • The review notes Rogoff helped pioneer this policy triptych as early as 1995.
  • Several emerging market economies have since adopted:
  • flexible exchange rates,
  • inflation targeting,
  • independent central banks,
  • stockpiling of foreign reserves,
  • strengthening of their financial systems.
• Historical linkages noted between fixed exchange rates and crises:
  • Fixed exchange rates contributed to all major crises in emerging markets cited: Mexico in 1994, East Asia in 1997, and Argentina in 2002.

Technological changes: CBDCs and cryptocurrencies

• Rogoff’s assessment of digital alternatives:
  • A digital dollar would easily eclipse other CBDCs because of the greenback’s status as the leading currency combined with US technological leadership.
  • Skepticism about cryptocurrencies’ ability to evade official control: governments have always found ways to regulate private currencies.

Risks to dollar dominance identified in the review

• Factors that could undermine the dollar’s supremacy:
  • Failure to fulfill responsibilities that come with the dollar’s privilege, such as providing dollars to the world economy during times of global stress.
  • Mounting US debt.
  • An unfounded belief that lower interest rates will last forever.
  • Complacency about inflation.
  • Challenges to the Federal Reserve’s independence.

Review assessment and contribution

• The review characterizes Our Dollar, Your Problem as:
  • Timely in light of the dollar’s perceived weaponization in geopolitical rivalries and recent flight from US financial assets.
  • A valuable guide for policymakers navigating current global financial challenges.
  • Providing a nuanced examination of the geopolitical and economic implications of a dollar-centric world and a significant contribution to recent literature on dollar dominance.

Source: F&D Magazine — A Critical Look at Dollar Dominance, MOUHAMADOU SY, June 2025.

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• A Critical Look at Dollar Dominance
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