Bank of England Governor Mark Carney said Thursday that the U.S. dollar’s dominance over the global financial system is in no immediate danger, but stressed that changes are slowly under way as China’s financial opening proceeds.
Carney, in a speech at an Institute of International Finance (IIF) meeting in Tokyo, said that the greenback’s position remains strong even as emerging economies steadily increase their share of the global economy.
For example, he said their share of global GDP was more than one-third 36 years ago when the IIF was founded. And it is expected to rise to around 75 percent by 2030 from the 60 percent achieved during the most recent tightening cycle by the Federal Reserve, he said.
“But while the real economy, the real global economy is being reordered, the international monetary and financial system has barely begun its transition,” he said.
The dollar remains the “currency of choice,” he said, accounting, for example, for at least half of international trade invoices, two-thirds of global securities issuance and dominating two-thirds of foreign exchange reserves and external debt.
“In other words, the dollar is as dominant today as it was at the end of the Bretton Woods era,” he said, referring to the period between 1945 and 1971 of essentially fixed global exchange rates linked to gold. “And it’s likely to remain so for some time.”
‘There will be a rebalancing’
All of that means that the United States has “disproportionate influence on global economic and financial conditions,” Carney said. He spoke ahead of a meeting of Group of 20 finance ministers and central bankers in the Japanese city of Fukuoka this weekend. G-20 leaders meet in Osaka later this month.
Citing historical trends, he said emerging market external liabilities could double as a share of GDP over the next decade.
“So it’s plausible that the dollar will be as dominant in 2030 as it is today,” he said.
Carney’s remarks come as the U.S. dollar’s share of global reserves are declining.
In the fourth quarter of last year, U.S. dollar reserves held by central banks declined to $6.62 trillion, or equal to 61.69% of allocated reserves, from $6.63 trillion, or 61.94 percent, in the previous quarter, Reuters reported in March, citing International Monetary Fund data. Chinese yuan reserves, meanwhile, increased to 1.89 percent, the most since the Washington-based IMF began reporting the currency’s share of such reserves in the final quarter of 2016.
In a question-and-answer session with UBS Chairman Axel Weber after the speech, Carney said that changes are slowly taking place, citing China’s opening.
“There will be a rebalancing at some point of global reserve currencies,” Carney told Weber.
Citing the example of Britain, he said that such change “tends to happen … later than the rebalancing of global economic weight.”
And while Carney, a former Goldman Sachs executive and ex-Bank of Canada governor, made no projections on when such a rebalancing will occur or to what extent, he said examples of China’s ongoing opening include bilateral trade invoicing, financial flows through its Belt and Road Initiative infrastructure project and the development of its local currency green bond market.