MNI INTERVIEW: US Dollar Leadership Eroding-Ex-IMF adviser

A combination of rising political risk, fear of economic sanctions and new financial technologies will gradually erode the U.S. dollar’s supremacy in global capital markets and trade in coming decades, ex-IMF adviser Josh Lipsky.

Protracted debt ceiling negotiations, while ultimately successful at avoiding default, add to the impression that the U.S. is not as trustworthy a partner as it was in the past, said Lipsky, also a former State Department official and now senior director of the Atlantic Council's GeoEconomics Center.

“Just because there’s no alternative doesn’t mean the rest of the world is not deeply frustrated. The world is increasingly exasperated by this,” he said in an interview.

“For Biden to have to go the G7 and have to hear from the other leaders about the biggest threat to the global economy coming from inside the house – for the U.S. – is hugely problematic long term for U.S. leadership, maybe not short term because of the lack of viable alternatives.” (See MNI INTERVIEW: U.S. Fiscal Trajectory Deviating From AAA Peers-Fitch)

The G7’s decision last year led by the United States to freeze Russian central bank assets has led to trepidation among other major countries, he said, though he added that he viewed the move as morally justified following the invasion of Ukraine.

“There were ripple effects, and significant ones from the G7 sanctions on Russia, specifically the freezing of the assets, the USD300 billion," said Lipsky. “That made a lot of countries, not just China and Russia – India, Indonesia, think about their dollar holdings, their inability to access dollars if they were to be on the wrong side of the U.S. in a particular situation.”

SLOWLY BUT SURELY

Lipsky said the dollar’s status as the world’s reserve currency is not under immediate threat, but will likely be chipped away incrementally over time.

“None of that can change overnight for all the obvious incumbency reasons. But it does mean countries are looking and we should take that signal seriously,” he said. “The dollar’s reserve status in a ten- to 20-year period is not under threat in a significant way, it just may be slightly eroded with a few other currencies – yuan, euro, etc. growing. The dollar is still dominant – just not as dominant as it once was in 10 to 15 years.”

Advances in financial technologies that allow for more rapid, seamless transactions between banks in different countries also risk leaving the U.S. behind, especially because many nations have taken discussions about creating a central bank digital currency more seriously.

“It’s the wholesale CBDCs, the bank-to-bank CBDCs. China, Thailand. We see a doubling of interest in wholesale central bank digital currency in the past year since the sanctions. And I think the sanctions are a factor in that,” said Lipsky. “Now you go through the dollar because that’s how the systems are built, because it’s a stable intermediary, but if you can settle more quickly and you have enough liquidity, you don’t actually need the dollar to do that.”