The Contemporary Dynamics of the Dollar: Perspectives and Influences

The analysis of the dollar's hegemony on the international scene leads us to examine its geopolitical and economic implications. This second part addresses the complexities and mechanisms that sustain the dollar as an international currency, exposing the advantages, disadvantages and political power that arises from this position.

At the end of World War II, the dollar emerged as a prominent global currency. This prominence is not only due to the robustness of the American economy, but is also sustained by historical, commercial and financial elements. The status of the dollar, closely linked to the geopolitical influence of the United States, is sustained by a series of factors that consolidate its position as a global reserve currency and unit of account, in addition to serving widely as a medium of exchange.

The Triple Function of the Dollar and Money in a Global Context

The centrality of the dollar lies in three basic functions that it shares with other currencies: medium of exchange, unit of account and store of value. However, its global dominance is such that it plays these roles with an intensity that transcends national borders.

1. Medium of Exchange: A currency widely accepted in many economies, it facilitates the purchase and sale of goods and services between nations. By fulfilling this function, the dollar becomes an international transaction currency, accepted in virtually all countries.

2. Unit of Account: The dollar serves as a basis for measuring and comparing values, which facilitates transactions and the understanding of global quotations, from commodities to the financial market.

3. Store of Value: As an instrument for storing value, the dollar represents security and liquidity. Even though inflation and devaluation affect currencies, the dollar maintains its role as the main safe-value asset.

In addition to its three functions, the dollar, like other successful currencies, has six fundamental properties: fungibility, durability, divisibility, portability, knowability and scarcity. These characteristics increase its efficiency and universality in the international market.

Essential Properties of the Dollar

- Fungibility: Any dollar unit can be exchanged for another of equal value. This contrasts, for example, with Bitcoin, where usage history impacts fungibility.

- Durability: Dollar bills and coins are designed for repeated use, which favors the longevity of the currency in circulation.

- Divisibility: The dollar can be divided into smaller units, facilitating transactions of varying amounts.

- Portability: Money needs to be easily transported, and the dollar meets this requirement by being accepted in physical and digital transactions globally.

- Recognizability: The clarity of the value of dollar bills facilitates immediate recognition of their value, unlike more specific assets, such as precious stones.

- Scarcity: Control of the issuance of the dollar by the US government is essential to maintain its value and avoid excessive devaluation.

Fundamentals of Dollar Supremacy

The strength of the dollar reflects the vitality of the United States economy, combined with the physical and political security offered by its geopolitical position. The openness of American markets and the democratic stability of the country are factors that consolidate the confidence of other nations and investors in the dollar. Based on the international interest and need for a common currency, the dollar has emerged as the predominant choice. The world "demands" dollars, mainly due to the convenience of having a common currency for international transactions.

The Importance of Foreign Currency Reserves

Foreign currency reserves are strategic instruments for the economy of any nation. Countries accumulate dollars and other currencies to ensure security in times of crisis and maintain monetary stability. During a pandemic, for example, a country needs reserves to import essential goods, such as masks. In economic crises, dollar reserves allow central banks to stabilize the value of their currencies. It is estimated that around 60% of the world's reserves are in dollars, which highlights the importance of this currency as a global economic pillar.

Trade Balance and the Impact of the Dollar on International Relations

The relationship between the trade balance and the exchange rate directly influences global economies. A country with a devalued currency, such as China, tends to export more, as its products become more competitive in terms of price. This generates an accumulation of dollar reserves for exporting nations, but creates a dependence that makes it difficult for the US currency to intentionally devalue.

In the 1980s and 1990s, pressure from the United States on Japan to appreciate the yen resulted in a decade of economic crisis for Japan. This episode illustrates how economic interdependence, based on exchange rates and export/import policies, generates disputes and tensions between nations.

Financial Infrastructure and the Power of the Dollar in the International System

The supremacy of the dollar is sustained by transnational networks that operate mostly in dollars. This system includes Fedwire, which connects banks in the US, and CHIPS, a clearing house that moves billions of dollars daily. Furthermore, SWIFT, which facilitates financial transactions in more than 189 countries, also strengthens the dollar’s presence.

This dominance of the global financial system allows the United States to enforce economic sanctions and control international monetary flows. This infrastructure ensures the dollar’s status as the currency of choice, which is strengthened with each dollar transaction in international trade.

The Future of the Dollar: A Sociological Analysis of Schools of Thought

There are three main schools of thought that attempt to explain the dollar's dominance and predict its future.

1. Market Model: Economists argue that the dollar prevails because it is advantageous in the global market. For market players, the dollar represents trust, liquidity, and connection to a broad financial network. Trust in the dollar stems from the economic stability of the United States and the perception that the American currency will remain strong, even in crises.

2. Instrumentalism: The use of the dollar by other governments is justified by the need for stability and predictability in their economies. The "pegging" of currencies to the dollar protects against extreme exchange rate variations and inflation, contributing to the solidity of the economies tied to it.

3. Geopolitics: This model argues that the currency of a dominant country is naturally the dominant currency. The United States, as a global power, imposes the dollar on the international market. Furthermore, its geographic position and political stability give the dollar a strategic advantage that is difficult for other nations to replicate.

The Geopolitical Role of the Dollar

A dominant currency generates numerous advantages for its home country. The first of these is cheap financing, since the United States can borrow at very low interest rates. During crises, global investors seek safety in the dollar, which strengthens their position and increases the purchasing power of Americans.

The ability to impose economic sanctions on countries such as Iran or Russia exemplifies the control that the United States exercises through the dollar. Russia, for example, tries to reduce its dependence on the dollar, but the logistical and economic difficulties demonstrate the challenges of being an international player without full access to the global financial system.

Challenges and Potential Substitutes for the Dollar

Although the dollar seems indisputable as the dominant currency, its position may be threatened. The euro, despite being a currency of multiple nations, faces structural limitations, while the Chinese currency still does not offer the level of openness and trust required on the international scene.

The dollar’s continued dominance as the dominant currency depends on economic and geopolitical factors, as well as the lack of a clear alternative that combines trust, liquidity, and global infrastructure. As long as no other currency offers this combination of qualities, the dollar seems destined to maintain its role as the global monetary leader.

Conclusion

The dollar’s supremacy reflects the economic strength and geopolitical influence of the United States. Its position as the dominant currency is the result of a complex set of factors, including market confidence, the instrumental advantages it provides, and its role as the currency of the global superpower. As long as no other country or currency challenges this unique combination of economic and political power, the dollar will remain at the center of the global financial system.