How Global Trade Runs on U.S. Dollars | WSJ

Summary

The US dollar has dominated global trade since World War II, accounting for 88% of international transactions in 2019. Its dominance gives the US significant power over global trade, including the ability to impose sanctions. However, this control has frustrated rivals, leading some countries to develop alternatives. The EU and India are building systems to bypass US sanctions, particularly in trade with Iran. While the dollar still dominates, these efforts could weaken the US’s ability to control the global trading system in the future.

Takeaways

• 💵 The US dollar dominates global trade, with 88% of international transactions in 2019 involving the dollar.
• 🌎 Commodities like oil, gold, and coffee are priced in dollars, regardless of where they come from.
• ⚖️ The dollar's dominance gives the US extraordinary power, especially over countries involved in international trade.
• 🏛️ The dollar became dominant after World War II, when the US was the largest economy, and other countries needed a stable currency.
• 💰 In 1944, 44 nations agreed to peg their currencies to the US dollar, which was tied to gold at the time.
• 📉 Even after the US abandoned the gold standard in 1971, the dollar remained the world's currency of choice.
• 🔄 A key reason for the dollar's continued dominance is its liquidity and the efficiency of the US banking system.
• 🇺🇸 The US uses its control over the dollar to impose sanctions and advance foreign policy goals, particularly after 9/11.
• 💳 Countries like the EU and India are developing alternative systems to bypass US sanctions and reduce reliance on the dollar.
• 🔮 The future of the dollar's dominance is uncertain, as other countries work to chip away at the US's influence in global trade.

Q & A

Why does the US dollar dominate global trade?

The US dollar dominates global trade because it is widely accepted, incredibly liquid, and supported by a very efficient banking system. After World War II, many countries pegged their currencies to the US dollar, and commodities like oil, gold, and coffee are priced in dollars, regardless of origin.

How did the US dollar become the world's currency of choice?

The US dollar became the world's currency of choice after World War II when the US was the largest economy, and many countries needed a stable currency. In 1944, a conference of 44 nations agreed to peg their currencies to the US dollar, which was then pegged to gold. Even after abandoning the gold standard in 1971, the dollar remained the primary global currency.

What role do correspondent banks play in US dollar transactions?

Correspondent banks, which have accounts with the US Federal Reserve, facilitate international transactions involving US dollars. These banks ensure the seamless transfer of funds between different countries by using the US banking system, and their involvement gives the US legal jurisdiction over these transactions.

How does the US use its control of the dollar to influence foreign policy?

The US uses its control over the dollar to impose sanctions and restrict access to the global financial system for countries or entities it views as bad actors. For example, after 9/11, the US increased surveillance on global money flows to curb financing for terror organizations and used sanctions to pressure rivals like Iran.

What are some examples of countries trying to develop alternatives to the US dollar system?

The EU and India are developing alternative payment systems to bypass US sanctions. The EU has created a euro-backed system to facilitate trade with Iran without using US dollars, and India has its own system to trade with Iranian entities under sanctions.

Why is the EU opposed to US sanctions on Iran?

The EU opposes US sanctions on Iran because they want to maintain trade relations with Iran under the terms of the 2015 nuclear deal, from which the US withdrew in 2018. The EU is trying to develop a system to work around the US sanctions so it can continue trading with Iran.

What is the impact of US sanctions on Iraq?

US sanctions have significant leverage over Iraq due to its dependence on US dollars. For example, when Iraq considered expelling US troops, the US threatened to cut Iraq off from the US dollar system, highlighting the power the US wields through control of the global financial system.

How did the 9/11 attacks change the US approach to global money flows?

After 9/11, the US heightened its surveillance of global financial transactions in an effort to cut off funding sources for terrorist organizations. This marked an increased use of the US dollar’s dominance to achieve foreign policy and security objectives.

What could happen if the US dollar loses its dominance in global trade?

If the US dollar loses its dominance, it could weaken the US's ability to control the global trading system and enforce sanctions. Countries would have more flexibility to bypass US financial regulations, reducing America's influence over international transactions.

Why is the US dollar considered so liquid and efficient for global trade?

The US dollar is considered highly liquid because it is widely accepted and easy to buy and sell in global markets. The US banking system also contributes to this efficiency, making transactions in dollars faster and cheaper than in other currencies.