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A man walks by a screen showing the yen recovering against the dollar amid signs of intervention by the Japanese authorities in Tokyo on May 2. Photo: Reuters
Opinion
Macroscope
by Anthony Rowley
Macroscope
by Anthony Rowley

As US dollar dominance persists, what if the centre cannot hold?

  • No state can withdraw from globalisation on its own terms, and the world cannot have one power in effect running monetary policy on behalf of everyone else
Anthony Rowley
Anthony Rowley
Why you can trust SCMP
The US economy has got stuck. It is stuck with a relatively high inflation rate because of strong domestic consumption and employment, and it is stuck with high interest rates as a result. This in turn means it is stuck with a strong dollar, which then drags on US competitiveness.
In turn yet again, this encourages tariffs and other forms of protectionism which, when combined with geostrategic competition, mean the world’s largest economy is stuck with the label of being a trade and investment spoiler. And that is not the end of the story.
The United States is stuck too with strong capital inflows, attracted by the strong dollar like a moth to a flame. These push up the dollar even further and encourage the kind of foreign borrowing and growing national indebtedness that are beginning to worry US bond markets.
Where will this vicious circle end? Maybe in currency crises if major US trading partners such as Japan continue to spend their official reserves on trying to restrain their currencies from falling so far against the dollar as to threaten the danger of imported inflation.

Japan has spent a record near ¥10 trillion (US$64.15 billion) over the past month from its foreign exchange reserves on market interventions to prevent the dollar exchange rate from blasting above 160 yen, according to recent finance ministry data. Japan has sufficient reserves to be able to withstand this, but that is not the case with many other Asian nations that have seen the dollar soar higher against their currencies.

This could end in tears if the dollar remains in free flight or, contrariwise, if the US is forced to drop its interest rates – possibly quite sharply – to keep the “Make America great again” show going in the run up to the US presidential election in November. That could precipitate currency market turmoil or even a crisis.

What all this boils down to is that you cannot withdraw from globalisation on your own terms, as the US has been trying to do in its trade and geostrategic policies. And you cannot have one major power in effect running monetary policy on behalf of those who do not participate in the policymaking.

These influences radiate out from the US, which is at the centre for the obvious reason that it is the world’s largest economy. But what if, to quote the poet William Butler Yeats, “the centre cannot hold”? Then, as he suggested, “things fall apart” and “anarchy is loosed upon the world”.

Things are not falling apart just yet but the strain is showing in myriad ways. For example, there is a great sucking sound as global capital, which logically ought to be flowing from the rich “North” to the poorer “South” is instead flowing in the opposite direction, lured by the strong dollar.

The US is attracting ever more foreign capital to help fund its yawning external deficit and by the end of last year, the outstanding US official debt was equal to almost 100 per cent of its gross domestic product. That figure will only rise in the coming years, the Congressional Budget Office has predicted.

Foreign direct investment or “business” investment, which likewise ought to be flowing from North to South to facilitate development and in search of comparative economic advantage, has been flowing increasingly to the US.

This is despite the strong dollar and largely as a result of the Biden administration offering generous subsidies under the Inflation Reduction Act and other such initiatives in a geopolitically motivated contravention of globalisation logic.

The distortions created by having one major power effectively positioned at the centre of the world have been masked increasingly by the tactic of forming alliances, which justify themselves as instruments for the enforcement of the rule of law and as symbols of shared values. But this is no substitute for a stable global order.

One constant critic of the US tendency to picture and position itself at the centre of the world, economically and otherwise, has been Malaysia’s former prime minister and elder statesman Mahathir Mohamad. What he had to say in this regard on a recent visit to Tokyo was especially pointed and acerbic.
The 98-year-old Mahathir in his office in Putrajaya, Malaysia, on January 22. Photo: AP
According to the Nikkei newspaper, “Mahathir highlighted aggressive American leadership and unyielding stances as perpetuating global discord”. He cautioned that the world “may be going towards a third world war because if you press Russia too much and you appear to be wanting to conquer Russia, they may want to use nuclear weapons – that is going to damage the whole world”.
Washington, supported by Berlin, recently decided to allow Ukraine to use its supplied weapons to strike inside Russia. That could indeed threaten to unleash chaos upon the world. This risk should be a warning to all major powers to step back from confrontation – economic and otherwise – and to embrace compromise. The US can claim to be great for many reasons but the world will judge it by its deeds, rather than its words.

More statesmanship and less brinkmanship would go a long way in burnishing that image. Otherwise a great nation could come unstuck for want of true vision and balance.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

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