In the dog days of summer 70 years ago, Gamal Abdel Nasser announced the nationalization of the Suez Canal. The move triggered the invasion of Egypt by a joint force of British, French and Israeli troops.
Although the military operation was a success, it was a diplomatic disaster. Led by the United States, the international community condemned the war, eventually forcing a humiliating withdrawal.
This subsequent financial fallout was devastating for the British pound. Having entered the crisis with a significant debt burden and fragile external balances, the loss of confidence in the sterling led to heavy selloffs.
Already relegated to a secondary reserve currency by then, the crisis was effectively the final nail in the coffin of the pound’s status as a global currency.
The US finds itself in much the same economic position as the United Kingdom did in the mid-1950s. America’s debt-to-GDP ratio is above 120%, a burden greater than almost any other point in the past half-century (it was only briefly surpassed during the Covid-19 pandemic).
Its current account deficit, which had steady narrowed after the 2008 global financial crisis, has reopened, even briefly plunging past 5% early last year. Long viewed as a safe haven in times of uncertainty, the dollar has actually shed value over the past year.
Make no mistake: the dollar remains the world’s premier currency, for now. International usage of the dollar remains robust. The greenback still accounts for roughly three-fifths of all foreign exchange reserves, and export invoicing is still almost exclusively denominated in dollars.
The rise of stablecoins — many tied to the dollar — has breathed new life into the currency, and strong financial market performance has also sustained interest in dollar assets.
But make no mistake: the world is steadily evolving toward a multipolar system, and that includes foreign exchange.
Trade in the European Union — which, lest one forgets, is still the third-largest economy in the world — now transacts predominantly in the euro. Beijing is increasingly pricing energy contracts in renminbi, and the yuan has become the linchpin of the CIPS, bypassing the dollar-dominated SWIFT network.
But there remain barriers that keep these two currencies from becoming more prominent fixtures in the global monetary system. The Euro Area remains reluctant to issue union-wide safe assets more aggressively, with conservative Northern states fearful that a Eurobond would socialize liabilities originating either from the profligate South or the poor East.
Never mind that economies such as Belgium and France are already carrying debt burdens greater than Spain and Portugal, and likewise for Austria and Finland vis-a-vis Slovakia and Slovenia.
Similarly, the Chinese have shown remarkable reluctance to make the yuan fully convertible, without which there will never be sufficient demand for it as a reserve currency. It is hard to blame China; memories of the wrenching adjustment during the 1997-98 Asian financial crisis surely still haunt Beijing.
After all, countries around the world — from Latin America in the 1980s to Southeast Asia in the 1990s to Argentina and Turkey in the 2000s — have failed to avoid currency crises after liberalizing their capital accounts.
There is seldom a singular moment that triggers the inexorable decline of an international currency. But geopolitical pressure is often a major catalyst.
The Anglo-Dutch wars in the 17th century strained Dutch resources, weakening its maritime supremacy and accelerating the guilder’s retreat as a global reserve currency. The fragmentation of the Holy Roman Empire that followed the Thirty Years’ War spelled the doom of the thaler as a preferred medium of exchange, within the empire and beyond.
When exacerbated by a weakening of fiscal and external balances, the unwind is even faster.
Roman military adventurism after the 3rd century emptied state coffers and led to widespread debasement of the denarius. Piles of Roman coins have also been found in India, a clear sign of the large trade imbalances the former was running at the time.
A similar pattern of deficits has been observed in Abbasid-era dirhams across Europe, especially in the Frankish realm, a canary in the coal mine for the eventual fall of the caliphate.
The Suez Crisis was the final nail in the coffin of the British pound as a global currency. While the Hormuz crisis may not immediately do the same, it is the first of what could be many more nails in the exorbitant privilege that the US dollar has until now enjoyed.
The author is an associate professor of economics at ESSEC Business School‘s Singapore campus, where he also serves as a member of parliament.
