FINANCE Bloomberg Businessweek July 22, 201929THE BOTTOM LINE Trump’s trade wars and aggressive foreign
policy have some longing for a serious rival to the dollar. But other
currencies have their own challenges.doesn’t have to be great, it just has to be the
least worst one,” says Paul Sheard, a senior fel-
low at Harvard and former chief economist of S&P
Global. “China is still a communist country tran-
sitioning slowly. Europeans point out themselves
that the monetary union is still a work in progress.
It will take decades for either to get to a point to
be real alternatives.”
Because of U.S. sanctions, Russian and Iranian
central banks have partially moved away from
the dollar in their holdings. Yet that’s done very
little to tip the scales, especially as much of the
diversification has come in the form of rising
gold reserves. Europe’s special financial chan-
nel for trade with Iran is so far only for food and
medicine—which U.S. sanctions already allow—and
has failed to persuade Iran to stick to the nuclear
agreement it struck in 2015.
Facebook, which counts almost a third of the
world population as users, is a formidable force
that has upended many legacy systems. Yet Libra
at this stage sounds more like an alternative pay-
ment system than a new currency. Visa Inc. and
Mastercard Inc. are among the project’s initial
backers. And the value of the Libra coin will be
based on a basket of traditional currencies. “You
need state backing for any legitimate currency,”
says Philip Suttle, a former Bank of England econ-
omist who now runs his own advisory firm. States
are unlikely to let Libra become a freewheeling
global medium of exchange, especially if it jeop-
ardizes anti-money-laundering efforts. And Visa
and Mastercard’s backing won’t last if the project
runs into regulatory hurdles, according to Morgan
Stanley analyst James Faucette.
Facebook executives faced skeptical U.S. law-
makers during hearings in mid-July. Sherrod
Brown, a Democratic senator from Ohio, called the
project “delusional,” adding: “Look at Facebook’s
record. We would be crazy to give them a chance to
experiment with people’s bank accounts.”
As for the euro and the yen, holding them has
limited appeal now because bond yields and inter-
est rates in the euro zone and Japan are so low—in
some cases negative. And there’s an added prob-
lem in Europe: “There’s no central euro bond, mak-
ing the continent’s bond market fragmented with
lots of different issuers, more like the U.S. munici-
pal debt market,” says Marc Chandler, chief market
strategist at Bannockburn Global Forex.
The yuan is a relatively new challenger as
China’s economy has grown rapidly to become
the second- largest in the world. Its share in
reserves, global transactions, and currency trad-
ing has been growing fast, albeit from a very lowbase. The International Monetary Fund didn’t
even break out the yuan’s share in global foreign
exchange reserves, including it in “other curren-
cies” until 2016.
A big hurdle for the yuan is that China’s policy-
makers manage its value, which makes market
players wary of it. “The yuan will definitely play
a bigger role, but how much depends on how
fast they’ll liberalize their currency,” says Fred
Bergsten, the founding director of the Peterson
Institute for International Economics.
Given all that, the biggest threats to the dollar
would have to come from the U.S. itself. Policies
that could lead to high inflation might erode con-
fidence in the currency, according to former BoE
economist Suttle. That could happen if Trump
replaced the Fed chairman and packed the central
bank with governors who’d follow his orders in
his second term—or if the same happened under
a populist Democratic president. “Fiscal expan-
sion financed by the Fed could crash the dollar,”
says Suttle.
But Congress would have to go along with both
the Fed appointments and the budgetary expan-
sion. The more likely scenario, Bergsten says, is
for the euro and yuan to become more important
in the next few decades, leading to a multipolar
currency regime. Even so, the dollar will probably
remain in first place. “If the U.S. screws up mas-
sively, Europeans and Chinese do the right things,
with all three happening together, the dollar could
lose its top spot,” Bergsten says. “That’s not an easy
combination to get to.” —Yalman OnaranILLUSTRATION BY NICHOLE SHINN. *THROUGH MARCH. DATA: INTERNATIONAL MONETARY FUND