[The Editors' Verdict] Considering the Era Beyond U.S. Dollar Dominance

Kim Kyung-soo, Professor Emeritus at Sungkyunkwan University

The Jackson Hole meeting, which attracts global attention, was held virtually last week. The big news this year was the statement by Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), about changing the framework of monetary policy from targeting inflation to average inflation, proactively responding to inflationary pressures. This means shifting the focus of monetary policy from inflation to employment. As Chairman Powell pointed out, the Fed's policy shift is influenced by concerns about economic inequality, where low-income groups, especially minorities, suffer when the labor market weakens. The Democratic Party has already amended laws to actively address economic disparities among races in response to ongoing racial conflicts.

The star of last year's Jackson Hole meeting was Mark Carney, then Governor of the Bank of England (BOE). He advocated for reforming the current international monetary system centered on the dollar, an issue long raised in academia. Although the U.S.'s global status is gradually declining, the dominance of the dollar as the settlement currency in international trade creates structural problems due to asymmetry.

Last year, 83.5% of South Korea's exports and 80.6% of imports were settled in U.S. dollars. The dollarization of trade eliminates the pathway for the won-dollar exchange rate to adjust the external balance through trade terms, instead causing global trade volume to contract during a strong dollar period and expand during a weak dollar period.

Moreover, the global financial cycle led by the U.S. Fed causes excessive capital inflows, asset inflation, and credit expansion under a low-interest-rate regime with a weak dollar, regardless of a country's macroeconomic situation. Conversely, a high-interest-rate regime with a strong dollar reverses the financial cycle. This global financial cycle forces emerging countries to forfeit monetary policy autonomy and inevitably follow the Fed's monetary policy direction. Therefore, Carney cynically described the inflation-targeting monetary policy as outdated.

The pandemic put the United States in a difficult position. The enormous number of casualties and the ensuing racial conflicts became catalysts dividing American society. The U.S. society has lost its self-correcting function to heal contradictions. Chairman Powell's remarks are nothing less than a declaration that the Fed will share the cost.

On the day Chairman Powell gave his speech, a report emerged that Ant Group, founded by Jack Ma of Alibaba, was simultaneously listed in Hong Kong and Shanghai, with its corporate value expected to grow more than fourfold (to $200 billion). Starting from third-party mobile payment services, Ant and Tencent's WeChat have evolved into giant financial companies, creating a financial ecosystem centered on payment functions within their platforms. Technology companies owning these platforms have become systemically important data intermediaries. China, on the verge of launching the digital yuan, has moved beyond being a financial underdeveloped country to building a technology-centered financial system. The media forecasts that the influence of the U.S. dollar will decline in the Belt and Road (一帶一路: land and maritime Silk Road) regions.

When a country's currency is used as a key currency, scarcity and trust have a conflicting relationship. Too little leads to liquidity shortages, while too much risks devaluation. Chairman Powell's remarks immediately raised inflation expectations. Treasury yields rose, the U.S. dollar index fell, and gold prices hit record highs.

The dollar faced a test of trust early in the pandemic crisis. At the Jackson Hole Conference, former Governor Carney proposed a multipolar currency system as an alternative to the dollar-centered international monetary system, arguing that despite instability, the advantages of diversification are much greater. It is not a distant future when the euro, yuan, and Facebook-led digital currency Libra will compete with the dollar.

Kyungsoo Kim, Professor Emeritus, Sungkyunkwan University

This content was produced with the assistance of AI translation services.