“Mighty dollar” as the reserve currency
View(s):“The idea that the BRICS Countries are trying to move away from the Dollar while we stand by and watch is OVER. We require a commitment from these countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100 per cent tariffs, and should expect to say goodbye to selling into the wonderful U.S. economy. They can go find another ‘sucker!’ There is no chance that the BRICS will replace the U.S. Dollar in International Trade, and any country that tries should wave goodbye to America.”
Global threats
Apparently, the statement is intended to challenge any potential move of the BRICS countries to create an alternative reserve currency. They have expressed the idea at their last Summit held in Kazan, Russia during October 22–24.
Sri Lanka had also submitted an application for membership at BRICS. After reading Trump’s Twitter message, one could immediately think that it is good that this application was turned down! With over US$3.5 billion exports and with preferential market access, the US is Sri Lanka’s largest export destination, while Sri Lanka also enjoys the largest bilateral trade surplus. Until and unless Sri Lanka is able to expand and diversify its trade, this status-quo would continue to remain the same for the near future.
The Central Bank maintains reserves in US dollars.
Trump was also reported to have made another controversial statement about Canada, asking it to become the 51st State of the US if the country cannot survive without taking $100 billion annually from the US. Although the $100 billion figure does not align with bilateral trade deficit between the two countries, usually the US has been experiencing a massive trade deficit with respect to its global trade. The US has trade deficits with all of its major trading partner countries – Mexico, Canada, China, Germany and Japan.
The world is again frightened about the new policies that Trump may initiate because they would create trade frictions and hurt many countries that would trade with the US. The underlying motive of the potential new policies is to “make America great again” and to defend it against any emerging global threats.
Financing US debt
After reading Trump’s Twitter message, I thought that it is not only about the US fiscal deficit and trade deficit, but also the “global trade expansion” has been the underlying factors of public debt piling up in the US. Accordingly, my point is that the emerging alternative currencies would eventually help the US to slow down its public debt accumulation!
In spite of the fact that the US is the world’s largest economy, it is also the world’s top-most country that is living beyond its means. The government spends more than its tax revenue; in the fiscal year 2023/24, the US budget deficit was $1.83 trillion. The country imports more than its export earnings; in 2023, the US trade deficit was $773 billion which needs to be balanced with capital inflows including borrowings.
Accordingly, the US government must cover its fiscal deficit by selling US Treasury Securities such as the Treasury Bills, Treasury Notes and Treasury Bonds. Apart from covering the budget deficit, part of the borrowings must meet the cost of ‘rolling over’ the previous borrowings. This means that the US public debt is getting piled up annually.
US public debt which has now reached $35 trillion in 2024, was about $10 trillion some 20 years ago. While the interest payment alone has reached $1 trillion now, its primary balance is negative 2.2 per cent of GDP, indicating the increase in public debt to meet primary spending.
The “mighty US dollar”
When the US asks for more borrowings, there should be investors who would be willing to spend their money to buy US Treasury securities. They are the countries in the rest of the world which at least partially finance US public debt; but why?
The US dollar is the top-most reserve currency in the world, while it has become the “mighty US dollar” for a number of historical factors. The US achieved the post-war economic dominance in the world which still contributes to a quarter of the world GDP. The country is also holding the world’s largest gold stock over 8,000 tonnes. These factors make the US dollar the most stable international currency in the world. Its supreme status as the international currency was legitimised by the Bretton Woods Agreement in 1944.
The size and liquidity of the US financial markets continued to attract foreign investors and countries wishing to hold dollar reserves that are less affected by inflationary pressure. Therefore, even today nearly about 60 per cent of foreign reserves maintained by the central banks in the world is in US dollars.
As we know, world trade has been expanding more than the increase in world GDP over the years, while in this respect the performance during the past few decades has been remarkable. Since the turn of the Century, the world experienced a four-fold increase in exports reaching over $30 trillion. And the export growth of many Asian countries including China and India has made the largest contribution to the increase in world exports.
World exports and US debt
By implication the massive trade expansion in the world also creates unending demand for the US Treasury securities among other things for the accumulation of foreign reserves in individual countries. The irony is that the US must meet the world demand for dollar assets which are piling up in the rest of the world as foreign reserves; this demand, in turn finances the US debt pile!
During the past 25 years, the world’s foreign reserves have increased from just $2 trillion to $12 trillion (2000-2024), while part of it is held in US dollar assets. Japan is the largest holder of US Treasury securities through which it has lent over $1,100 trillion to the US. The second and third holders of the US securities are China and the UK, which hold over $750 billion each.
The point that I want to get across is that the increase in US public debt meets the different requirements of two parties. On the one hand, it is intended to cover the US fiscal deficit as well as debt “rolling over” requirements. On the other hand, it is intended to meet the needs of the rest of the world to accumulate reserves, which is also important for managing global interest rates.
Diversifying reserves
Although the underlying idea of Trump’s Twitter message is to defend the international status of the “mighty US dollar”, the attempts to create alternative reserve currencies would reduce the willingness to finance US debt. Perhaps, it might have a positive implication on US debt piling because then the US government has few problems of its own to manage – that is fiscal consolidation and debt sustainability.
There are two important points to be noted. The first is that even if a trade surplus is achieved and a sound fiscal management is restored, borrowings can be continued. Countries such as China and Japan are not only the largest lenders to the US, but also the issuers of their own debt instruments to borrow.
Secondly, although it is not for the interest of the US, the world dynamics may alter the reserve currencies over time. The Euro has become the second largest reserve currency accounting for 20 per cent of the world reserves now, reducing the dominance of the US dollar as well as the UK pound and others.
About 2 per cent of the world reserves are already in Chinese Yuan, which has also emerged recently as an international reserve currency. This means that the world’s reserve currency basket is getting diversified in the years to come.
(The writer is Emeritus Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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