The story of the dollar

The fascinating story of the dollar has taken a new turn that is widely known as de-dollarisation. Countries are cutting their reliance on the US dollar as the reserve currency, the primary medium of exchange and the unit of account. Therefore, de-dollarisation represents a changing preference.

Instabilities of the US dollar occurred several times in the past, influenced by financial and geopolitical forces that were beyond America's control.

The end of World War II prompted the need for a currency of reserve and international trade. Thus, in July 1944, some 44 countries with over 700 delegates assembled at Bretton Woods, New Hampshire of the US and chose the US dollar for this role. The resolution is referred to as "The Bretton Woods Agreement". Through the agreement, the underlying value of the dollar was to be backed by gold with an ounce of gold valued at $35.

With time, nations grew uncomfortable with the dollar's dominance and began redeeming gold for the dollar. At one stage, France sent a warship to carry back all gold bullion by redemption of the country's entire dollar reserve. In response to this untenable position, President Nixon in 1971, put a temporary embargo on the conversion of the dollar to gold. Overnight the dollar became a fiat currency, which is something that has no tangible asset backing i.e., bullion or commodity. This was the first event of undermining the mighty US dollar.

In 1962, the USSR (now Russia) stealthily installed nuclear-capable missiles in Cuban coastlines, aiming at the US. Anticipating a retaliation, the USSR overnight transferred all of its dollar deposits to European banks. The decision gave rise to the so-called "Eurodollar", a dollar deposit in banks outside of the US. This event further weakened the US jurisdictional control over the dollar.

With a sudden surge in oil prices in the 1970s, OPEC countries had a windfall revenue, coined as the "Petrodollar". The dollar stream ended as deposits in international banks and was recycled to Latin American countries as sovereign loans. Soon the countries defaulted, triggering write-offs.

Widely debated, the subprime mortgage scheme was another setback for the US dollar. The scheme originally aimed at increasing home-ownership for low-credit holders. Bankers, mortgage brokers, property assessors and borrowers alike misused the scheme leading to a financial crisis in 2007.

A former US executive director at the IMF, Meg Lundsager, summarised the paradoxical position of the US dollar in the following words: "When there is a big international role for your currency, you lose control over it."

From a global perspective, the lack of a gold standard was largely compensated by America by safeguarding the free movement of capital, upholding the liberal values of democracy, inspiring innovation and protecting the patent rights of products. They ushered globalisation by freeing their borders for technology and resource sharing.

However, American leadership became overconfident and bullish. The nation is unique given that it can both borrow and pay back in its own currency. This advantage was widely misused by the financing of overseas wars and continuous deficit budgeting.

On the flip side, the potential new world order set by Brazil, Russia, India, China and South Africa (BRICS) is yet to be open up to embrace norms and processes set by Americans. Thus, it is a passing story of the world reserve currency. Time will tell the rest.

The author is an independent director and chairman of the audit committee of Bank Asia Limited. He can be reached at dhc707@gmail.com