Rajan dismisses the idea of BRICS nations forming a serious challenge to the dollar's dominance. He highlights internal conflicts, like the India-China border dispute, and divergent interests as fundamental weaknesses. The group serves as a forum for discussion but lacks the cohesion for major initiatives like a common currency.
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COFA data reveals a significant multi-year trend where a bloc of unspecified "other currencies" is steadily gaining share in global reserves. This group has displaced more of the US dollar's declining share than the Euro, Yen, or Sterling, indicating a broad, under-the-radar diversification movement by reserve managers.
Global demand for dollars as the reserve currency forces the U.S. to run persistent trade deficits to supply them. This strengthens the dollar and boosts import power but hollows out the domestic industrial base. A future decline in dollar demand would create a painful economic transition.
Raghuram Rajan explains that central banks are increasing gold reserves not just for diversification, but as a direct response to geopolitical risks like the seizure of Russian assets. This 'weaponization of payments' erodes trust in holding reserves in foreign currencies, making physically controlled gold more attractive as a neutral asset.
While the idea of US growth re-acceleration is driving dollar strength, it's not the only story. Recent positive surprises in European PMI data and upgraded Chinese GDP forecasts suggest broader global growth resilience. This breadth should help cap the US dollar's rally and may promote weakness against other currencies.
A top Putin advisor's claim that the US is using crypto to devalue its debt is not genuine concern. It is a calculated geopolitical move to publicly discredit the dollar while promoting the alternative gold-backed monetary system that Russia and China are actively building together.
The US dollar's dominance is less about its role in oil transactions (petrodollar) and more about its deep integration into global banking and financial plumbing via the Eurodollar system. This structural entrenchment makes it incredibly difficult to displace.
The primary risk for the U.S. is not the inevitable decline of the dollar's dominance, which could rebalance the economy. The danger lies in trying to fight this trend, leading to a disorderly and painful collapse rather than a graceful, managed transition from a position of strength.
The US dollar reached its peak global dominance in the early 2000s. The world is now gradually shifting to a system where multiple currencies (like the euro and yuan) and neutral assets (like gold) share the role of reserve currency, marking a return to a more historically normal state.
Each time the U.S. uses financial sanctions, it demonstrates the risks of relying on the dollar system. This incentivizes adversaries like Russia and China to accelerate the development of parallel financial infrastructure, weakening the dollar's long-term network effect and dominance.
A nation’s currency becomes dominant long after its economic and military power is established. Similarly, it retains that status due to network effects long after other metrics of power have begun to decline. The dollar's persistence is an example of this lagging effect.