What does Prime Minister Mark Carney have against the U.S. dollar?
Plenty, it turns out. And his recent calls for an alternative to the U.S. greenback as a global reserve currency will not go over well in Washington, where the dollar’s dominance is seen as an indispensable tool in the conduct of U.S. economic and foreign policy.
The U.S. dollar accounts for about 57 per cent of foreign exchange reserves held by the world’s central banks. While the proportion is down from about 70 per cent in 2000, it far outweighs the U.S. share of the global economy (about 26 per cent) and global trade (12 per cent). Most international trade between non-U.S. countries is conducted in dollars.
The dollar’s pre-eminence stems from the sophistication, liquidity and depth of U.S financial markets, and the perception that U.S. Treasury bonds remain the world’s safest asset. The latter assumption is increasingly being called into question as the U.S. federal debt surpasses US$40-trillion and as President Donald Trump undermines the rules-based foundations of the international trading system that the United States created.
Both Republican and Democratic administrations have used access to the dollar-denominated payment systems as leverage against U.S. adversaries, mostly through sanctions, prompting China and other BRICS countries to seek substitutes for the dollar in global trade.
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Still, none has emerged. The renminbi cannot be a dollar substitute as long as China limits capital flows and its legal system remains under Communist Party control.
There is simply no credible alternative to the U.S. dollar in global finance. And any attempts to promote one risks being seen as a threat in Washington, where, regardless of party, dollar dominance is sacrosanct.
That has not stopped Mr. Carney from going there. In his speech last week before the European Parliament, he warned that “financial mechanisms are being used for coercive purposes.” He hinted at closer Canada-Europe co-operation on “payments systems” to bypass U.S.-controlled ones.
In a Wednesday interview with The New York Times, Mr. Carney said the dollar’s dominance of the global financial system was unsustainable and that a move to a multipolar system with several reserve currencies would “provide more flexibility.” He added that demand for dollar alternatives would grow because of the U.S. administration’s weaponization of trade.
“It’s the ‘fool me once, fool me twice’ point,” Mr. Carney told the newspaper. “Once you see that, then you start to think, how do I diversify away?”
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As governor of the Bank of England, in 2019, Mr. Carney proposed the creation of a “synthetic hegemonic currency” (SHC) comprised of central bank digital currencies that could supplant the U.S. dollar as a global reserve currency. “An SHC could dampen the domineering influence of the U.S. dollar on global trade,” he said then.
The Financial Times speculated at the time that Mr. Carney’s speech would be seen as “an attempt to burnish his credentials as a possible future [International Monetary Fund] managing director, appealing to emerging economies in particular.” That gig ended up going, a month later, to Bulgaria’s Kristalina Georgieva.
Mr. Carney’s latest talk about reducing the U.S. dollar’s role in the global financial system runs directly counter to the Trump administration’s stated policy of ensuring the greenback’s pre-eminence, in part as a means to enhancing U.S. influence in international affairs.
“Dollar dominance is essential,” U.S. Treasury Secretary Scott Bessent this month told CNBC. “It’s never left as the centrepiece for the global currency system, but we’re reinforcing it ... And I think we should not be shy about flexing where we have advantages … and push back on those who are not aligned with us.”
While speculation about a lessening of the U.S. dollar’s position as the fulcrum of the global financial system continues to drive conversations among economists and academics, the greenback is not in any near-term danger of being supplanted by the renminbi or euro.
“[E]ven as its absolute dominance has receded, the dollar’s position relative to its ostensible rivals has not been dented: the euro and the [renminbi] have instead lost ground to a host of smaller currencies, fragmenting currency power in the second tier,” economists Eswar Prasad, Gordon Liao and Tony Zhang conclude in a paper presented at the annual gathering of central bankers last month in Wyoming.
Mr. Carney’s idea for a synthetic hegemonic currency did not gain any traction when he first proposed it in 2019. The question remains whether he is again tilting at windmills by reprising his calls for a reduction of the U.S. dollar’s dominance in global finance.
The move may win him more fans among the BRICs and emerging economies that seek to end the greenback’s stranglehold on global trade and finance. But it is unlikely to yield tangible results while he is Prime Minister.