[T]here appears to be just one true pole in the system–namely, the US dollar. The euro, number two globally, lags well behind the greenback; other secondary currencies appear to be little more than niche players; and the RMB is so far back in the race that it still barely even registers. (Benney and Cohen, 2022, 458)
The dollar’s dominance is tied up with the outsized role of the US financial system – the world’s most powerful by virtually any metric (see Fichtner, 2017). The dollar, the US banking system, and the Fed provide the financial and technical architecture which enable other parties in the world economy to pursue international trade and investment. The global dollar system can itself be understood as a kind of platform, since most greenback transactions do not involve paper currency but rather movements on digital ledgers controlled by messaging infrastructure. Just one-tenth of dollars exists in physical form (Black, 2020). A majority of all dollar deposits are held outside of the United States as ‘eurodollars’.
Some economies such as El Salvador are fully dollarized, while a sizeable minority peg their currencies to its value. The US government exerts power over this system through the Federal Reserve’s autonomy over broad money creation and the setting of interest rates. Dollar dominance is upheld by the ‘swap lines’ through which the US Federal Reserve trades dollars for other currencies with central banks’ (Pape, 2022), acting as an effective lender of last resort during periods of currency pressure. The dollar’s stability, ubiquity, and the liquidity of currency and US financial markets grant the United States the ‘exorbitant privilege’ of an ability to run endless deficits, alongside the ‘exorbitant burden’ of consuming (via debt and security issuance) the world’s surpluses (Pettis, 2011).
The dollar’s global role as financial lubricant within the international banking system is underpinned by the messaging system provided by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), Clearing House Interbank Payments System (CHIPS) which nets and clears interbank payments, and the Fedwire Funds Service which manages central bank transactions. All three are dependent upon American regulatory institutions to function (Carter, 2012). Even SWIFT, despite being formally headquartered in Brussels and regulated by the Belgian central bank, is vulnerable to US financial sanctions due to its Virginia-based mirroring data centre. This has made it a key source of information for US counter-terror operations (Farrell and Newman,
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Reinventing Capitalism