The New York Times article on July 11th, titled: The Dollar is in Trouble, but the Reasons Aren’t What You Think
The implementation of reciprocal tariff policies by the US government has been going on for several months. In addition, the President of the United States recently posted a tariff letter on his social media platform “Real Social,” which will impose new tariffs on certain goods imported into the US. A question has been haunting people’s minds: Is the dollar still “healthy”? The answer is “not healthy,” but the underlying reason is almost unrelated to tariffs.
The United States was once the hub for ninety percent of currency exchanges.
Our debate about the dollar overlooks a fact: the dollar is weakening, and this situation has persisted for nearly ten years. We should not focus on the slow-changing macroeconomic indicators that showcase the traditional strength of the dollar, such as how much other countries’ central banks hold of it or how frequently the dollar is used in global trade. Instead, we should pay more attention to the fact that countries are rapidly changing the way the dollar operates through new payment systems.
Payment systems are the technical backbone processes for transferring funds between financial institutions. In such a complex global financial network system, the United States is the near 90% hub for currency exchange. Even if two countries do not use the dollar for transactions, the construction of this system makes the dollar an indispensable intermediary. This vast global financial system endows policymakers in the US with significant power, allowing them to achieve diplomatic policy goals, sometimes even weaponizing them. Restricting the use of the dollar by certain countries has always been a core tactic of US security strategy.
The dollar hegemony system is gradually disintegrating
However, the financial system created to ensure the dollar hegemony is gradually disintegrating. A typical example is the decline in the influence of the Bank for International Settlements (BIS), where policymakers in the US are increasingly relying on this organization to isolate certain countries or organizations, including so-called “terrorists.”
The Bank for International Settlements is an information-sharing system where banks can communicate first, and then transfer funds through other channels. This process is akin to someone sending a message on the instant messaging app WhatsApp to a friend, followed by a transfer via the mobile payment service Venmo, rather than directly making a payment to the sender.
Researchers from the Federal Reserve have stated that about 80% of cross-border bank payments still rely on the access of the Bank for International Settlements to the global financial system. However, the data cited by the Federal Reserve comes from a report in 2022. In fact, the transition between old and new payment systems is progressing smoothly. Just over a month ago, the Central Bank of the UAE joined the new system and developed a new cross-border payment scheme to serve banks in the Middle East and North Africa. In 2023, the government of Bangladesh decided to use non-dollar currencies to settle with a Russian company building a nuclear power plant in Bangladesh. There are many transactions that cannot be tracked by US officials because they occur outside the United States’ view.
Why has change come so quickly? The key lies in financial innovation technologies such as blockchain, which have reduced the cost of building new transaction systems and made the process more efficient. Countries that have long sought to cut off their ties with the dollar are now closer to achieving this goal.
Digitalization is key to future currency competition
Since the outbreak of the Russia-Ukraine conflict, the number of cross-border central bank digital currency projects has doubled, providing a novel way for commercial banks across different countries to transfer funds—within seconds without needing to go through US banks. This is precisely why the US only considers macroeconomics and not national security. American economists often do not consider currency as a critical lever in US foreign policy. They believe that minor adjustments have little impact on the overall health of the dollar.
However, they overlooked the fact that some countries could weaken the dollar used for U.S. national security. A mere $22 million in the national central bank’s account is a drop in the bucket. Yet, when this money flows into the new payment network, it can provide hundreds of drones to other countries on the battlefield.
The United States needs to quickly find new solutions; it should invest and restructure the 环球银行金融电信协会 with its headquarters in Europe. If countries supporting the dollar, euro, pound, and yen work together, leveraging their strong advantages, then other nations may not be able to catch up.
However, this is no easy task. By 2022, some central banks had over 300 people engaged in digital currency work; last year, the total number in the entire Federal Reserve system was less than 20. This is the key to future monetary competition. As Britain recognized a century ago, the status of the world’s reserve currency is not permanent. To maintain its dominance as the dollar, the United States needs not only innovation but also a clear understanding – its currency is far from being as healthy as it once was.