The Currency Once Pegged to the US Dollar NYT: Understanding the Shift in Global Economic Balance

The currency once pegged to the US dollar is a fascinating topic, and understanding the shift in global economic balance is crucial for anyone interested in finance and economics.

Hong Kong's currency, the Hong Kong dollar, was pegged to the US dollar from 1983 to 2005.

The peg was implemented to stabilize Hong Kong's economy and maintain its status as a financial hub.

The Hong Kong dollar was fixed at a rate of 7.85 to the US dollar, and banks were required to maintain a minimum amount of foreign exchange reserves.

This system allowed Hong Kong to maintain a stable currency and attract foreign investment, but it also limited the country's ability to implement independent monetary policy.

The history of pegged currency is a fascinating topic, and it's interesting to note that many countries have pegged their currency to the US dollar at some point in time.

One notable example is Hong Kong, which pegged its currency, the Hong Kong dollar, to the US dollar in 1983, with a fixed exchange rate of HK$7.85 per US dollar.

This peg allowed Hong Kong to maintain economic stability and attract foreign investment, which contributed to its economic growth and development.

The peg was maintained until 2005, when the Hong Kong Monetary Authority allowed the exchange rate to float within a narrow band.

Another example is the Singapore dollar, which was pegged to the US dollar from 1973 to 2007, with a fixed exchange rate of SGD 1.50 per US dollar.

Singapore's peg allowed it to maintain low inflation and attract foreign investment, which contributed to its economic success.

The peg was maintained for over three decades, until it was abandoned in 2007.

The experience of these countries highlights the potential benefits of pegging one's currency to a stable currency like the US dollar, including reduced inflation and increased economic stability.

De-dollarization is a growing trend among major U.S. rivals, with countries seeking to reduce their dependence on the dollar-based system.

China, the world's largest manufacturing economy, has been leading the charge, reducing its holdings of dollar-denominated assets and conducting more international trade in renminbi (yuan) since the 2008 Great Recession.

In May 2022, China's U.S. Treasury holdings hit a 12-year low, and in April 2023, the yuan surpassed the dollar as the most traded currency in Russia.

China's bilateral trade in yuan has also surpassed bilateral trade in dollars for the first time, with 49% of bilateral trades occurring in yuan in June 2023.

The yuan's growing popularity is a result of China's efforts to de-dollarize and reduce its reliance on a dollar-based system it perceives as fragile and unreliable.

The old view of de-dollarization is that it's a process where countries abandon the US dollar as their reserve currency and instead use their own currency for international transactions. This view has been around for decades, but it's not entirely accurate.

Many countries, such as China and Russia, have been gradually reducing their reliance on the US dollar in international trade and finance. According to the article, China has been promoting the use of the yuan in the Belt and Road Initiative, while Russia has been developing its own payment system, Mir, to reduce dependence on Visa and Mastercard.

The new view of de-dollarization is more nuanced and involves a shift away from the dollar's dominance in international trade and finance, rather than a complete abandonment of the currency. This shift is driven by a desire for greater financial sovereignty and reduced dependence on the US financial system.

Countries like Iran and Venezuela have been using alternative currencies, such as the euro and the yuan, in trade with other countries. Iran has been using the euro for oil exports, while Venezuela has been using the yuan for trade with China.

The rise of cryptocurrencies, such as Bitcoin, has also been seen as a form of de-dollarization, as they offer an alternative to traditional fiat currencies for international transactions. However, the article notes that cryptocurrencies are still in their early stages and are not yet widely accepted as a form of payment.

The shift away from the dollar's dominance is not just driven by economic considerations, but also by geopolitical factors. The US has been using its financial power to exert influence over other countries, and de-dollarization is seen as a way to reduce this influence.

In the mid-1940s, the United States committed to wielding its power responsibly at Bretton Woods. By the mid-1960s, other governments, including France, were complaining that the U.S. government was abusing its power for its own gain.

French President Charles de Gaulle publicly accused the United States of printing more dollars than it had gold in reserve to back them. This was seen as a major issue because the gold standard disciplines and constrains governments by making it harder to create and spend money on costly projects.

The United States was able to grow and industrialize at a steady rate, finance wars, and start new social programs despite its financial irresponsibility. The real value of the dollar, the most important financial asset held by other countries, gradually eroded as a result.

The U.S. government was essentially pushing the costs of its spending onto other countries by diluting the dollar's purchasing power. This made it harder for other countries to trust the dollar and its value in global markets.

The International Anti-Dollar Movement is gaining momentum. Major U.S. rivals are taking steps to reduce their dependence on the dollar-based system.

China, the world's largest manufacturing economy and second-largest economy overall, has been leading the charge. It began a de-dollarization program in the wake of the 2008 Great Recession, gradually reducing its dependence on a dollar-based system.

Recent sanctions against China by the United States only expedited the process. China's multipronged strategy includes reducing holdings of dollar-denominated assets, conducting more international trade in renminbi (yuan), and supporting the efforts of multilateral organizations like the BRICS organization and the Shanghai Cooperation Organization (SCO) in their own bids to de-dollarize.

China's efforts are paying off. In May 2022, China's U.S. Treasury holdings hit a 12-year low.

The dollar's peg to gold ended on August 15, 1971, when President Richard M. Nixon announced the government would no longer convert foreign-held dollars into gold.

This marked a significant shift in the global economy, as the US dollar was no longer tied to a physical standard. The new policy aimed to reduce inflation and unemployment.

The dollar's devaluation led to a floating exchange rate system, where currencies were valued relative to each other. By 1973, all major world currencies were floating in value.

The monetary fund responded to these changes by introducing a basket of 16 widely used currencies in 1975. This basket was later simplified to the currencies of the Group of Five industrial nations.

In a national context, dollarization can be a deliberate policy to adopt the U.S. dollar over a domestic currency to promote macroeconomic stability. This policy is often motivated by similar economic concerns, such as inflation and economic instability.

The case of Zimbabwe shows how countries experiment with different currency arrangements to find strategies that meet their needs. The country dollarized in 2009 due to years of political upheaval and poor economic management, which led to a 500 billion percent inflation rate.

Dollarization can lead to problems, such as a shortage of U.S. dollars, which makes it difficult for residents to access cash for daily transactions.

France was a key player in the Bretton Woods System from 1945 to 1958. The system was established to promote international economic cooperation and stability.

France, under the leadership of Charles de Gaulle, was initially hesitant to join the system, fearing it would limit its economic sovereignty. The French government was also concerned about the potential impact on its colonial empire.

France eventually joined the International Monetary Fund (IMF) and the World Bank, but it continued to have reservations about the system. The French government was particularly concerned about the potential for the IMF to impose strict economic policies on its member countries.

The French government's concerns were partly driven by its own economic struggles, including a significant trade deficit and high inflation. The country's economic woes were exacerbated by the loss of its colonial empire and the need to rebuild its economy after World War II.

France's relationship with the Bretton Woods System was complex and often contentious. The country's leaders frequently clashed with the IMF and the World Bank over issues such as trade policy and economic aid.

Dollarization is a national-level policy to adopt the U.S. dollar instead of using the domestic currency to promote macroeconomic stability.

In Zimbabwe, dollarization was used to stabilize the economy following years of political upheaval and poor economic management. The country's inflation rate reached 500 billion percent in 2008, rendering the local currency worthless.

Countries like Zimbabwe experiment with different currency arrangements over time to identify strategies and policies that best meet their needs. This is evident in Zimbabwe's decision to adopt a multi-currency system in 2009.

Zimbabwe's use of foreign currencies, mostly the U.S. dollar, helped reduce inflation but led to other problems, including dollar shortages and reduced monetary policy autonomy. The government surrendered its ability to manage the domestic money supply and interest rates.

Dollarization can have unintended consequences, such as reduced competitiveness of local exports and social unrest due to dollar shortages. This was evident in Zimbabwe, where residents struggled to obtain food, health care, and other necessary items due to dollar shortages.

In 2022, Zimbabwe introduced gold coins in an effort to de-dollarize and reduce its reliance on the U.S. dollar. The gold coins are expected to cost around US$1,800 each and are meant to provide a store of value for Zimbabweans.