The US dollar is tightening its grip on the global financial system at the expense of the euro, entrenching American hegemony and rendering the US Federal Reserve more powerful than at any time in history.

Newly-released data from the Bank for International Settlements (BIS) show that the dollar’s share of the $5.1 trillion in foreign exchange trades each day has continued rising to 87.6pc of all transactions.

It is the latest evidence confirming the extraordinary resilience of the dollar-based international order, confounding expectations of US financial decline a decade ago.

Roughly 60pc of the global economy is either in the dollar zone or closely tied to it through currency pegs or ‘dirty floats’, and the level of debt issued in dollars outside US jurisdiction has soared to $9 trillion.

This has profound implications for monetary policy. The Fed has become the world’s central bank whether it likes it or not, setting borrowing costs for much of the global system.

The BIS data shows that the volume of transactions in which the euro was on one side of the trade has slipped to 31.3pc from 37pc in 2007. The dollar share has ratcheted up to 87.6pc over the same period.

It is much the same picture for the foreign exchange reserves of central banks, a good barometer of global trust. The dollar share has recovered to 63.6pc, roughly where it was a decade ago.

The euro share has tumbled over the last eight years from 28pc to 20.4pc, and is barely above Deutsche Mark share in the early 1990s.

 “There are no foreseeable rivals to the dollar as a viable reserve currency,” said Eswar Prasad from Cornell University, author of “The Dollar Trap: How the US Dollar Tightened Its Grip on Global Finance”.

“The US is hard to beat. The US has deep financial markets, a powerful central bank and legal framework the rest of the world has a great deal of trust in,” he said.

The eurozone is crippled by the lack of a unified EU treasury, joint bond issuance, and a genuine banking union to back up the currency. It would require a change in the German constitution to open the way for fiscal union, an unthinkable prospect in the current political climate.

David Fuller's view

There is much to ponder in the section above and also in the remainder of this column, which I commend to subscribers.  While the article is mostly about Dollar hegemony, which will certainly increase over the next few years, part of the flip side is the unravelling of the eurozone which is now underway. 

A surprisingly large proportion of geopolitical commentators and politicians do not recognise or understand this, partly because they want and even need to believe in the eurozone.  They include plenty of intelligent people in the USA.  Knowing that two World Wars in the first half of the last century started in Europe, they have long viewed post-WW2 reconciliation by European nations as a ‘noble experiment’, and they would be alarmed by its failure.  

Arguably, it was a noble experiment, at least until the Maastricht Treaty of 1993, which I commented on yesterday.  However, governance is everything, as this service never tires of saying.  I am convinced that future historians will cite the EU as a textbook example of how not to create a large, successful federation consisting of a number of states.  The first and widely predicted blunder was the conversion to a single currency before a fiscal union has been established, assuming this could have occurred, which I doubt.  Currently, it would require a change in the German constitution to salvage the eurozone, an all but unthinkable development given present circumstances, as the article above points out.

Viewing the Euro’s existence as EUR/USD, much of its remaining strength comes by virtue of being the world’s second largest reserve currency.  However, it almost reached €160 in 2008.  It has ranged on either side of €110 since the start of 2015, having plunged from €140 as the Dollar Index surged.  Since the Euro is 57.6% of the Dollar Index, they are almost inverse mirror images of each other.

My medium to longer-term view is that the Dollar Index eventually breaks up out of its current trading range.  When that happens, the Euro will simultaneously break down out of its current range.  If it happens sooner, the reason would be an even faster break-up of the eurozone than I currently expect. 

Here is a PDF of AE-P’s article.