The Currency Stalemate: How U.S. and China’s Rigid Stands Threaten Global Economic Balance

Trump’s Trade War
Peace For Taiwan Is Possible
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Trump’s Trade War
Peace For Taiwan Is Possible
The Last Age of War, The First Age of Peace: Lord Kalki, Prophecies, and the Path to Global Redemption

The Currency Stalemate: How U.S. and China’s Rigid Stands Threaten Global Economic Balance

The global financial system is caught in a quiet but profound tug-of-war. On one side is the United States, fiercely guarding the U.S. dollar’s status as the world’s dominant reserve currency. On the other is China, aggressively pushing for dedollarization without making the structural reforms necessary for the yuan to step into that role. Both nations are clinging to contradictory and ultimately self-defeating currency policies—and the rest of the world, especially the poorest countries, may pay the price.

The Dollar’s Double-Edged Sword

America has long benefited from the dollar’s position as the de facto global currency. It allows the U.S. to borrow at lower costs, run massive deficits, and print money with relatively low inflationary consequences. More than military might, diplomacy, or even GDP, this financial supremacy is the cornerstone of American global power.

But this “exorbitant privilege” comes with an economic trade-off: chronic trade deficits. When you export your currency—because the world needs dollars for trade and reserves—you inevitably import goods and services. This structural imbalance has hollowed out parts of U.S. industry and fueled political backlash, even as it underwrites the global financial system.

China’s Currency Conundrum

Meanwhile, China aspires to chip away at dollar dominance. Through initiatives like the Cross-Border Interbank Payment System (CIPS), the digital yuan, and trade deals settled in renminbi (RMB), Beijing is laying the groundwork for a multipolar currency world. But there’s a fundamental contradiction at the heart of China’s ambition: the yuan is not fully convertible.

Capital controls remain tight. The value of the yuan is managed, often kept artificially low to favor exports—a cornerstone of China’s economic rise. But this very strategy undermines global trust in the yuan as a freely usable international currency. Until China opens its capital account and allows the market to determine the RMB’s value, its global aspirations will remain largely symbolic.

The Global Impasse

What we’re witnessing is a global currency system trapped by two immovable giants:

• The U.S. won’t sacrifice dollar dominance, even though it leads to unsustainable trade imbalances and financial vulnerabilities.

• China won’t liberalize the yuan, even though it limits the currency’s international reach and credibility.

This stalemate creates volatility in emerging markets, limits monetary policy options for poorer countries, and perpetuates an unstable, lopsided global order. In a world increasingly marked by regional blocs and shifting trade alliances, this rigidity does not serve the interests of global stability.

A Call for Reform

If neither Washington nor Beijing is willing to move, perhaps it’s time for the rest of the world—especially the Global South—to push for a more balanced system. This could include:

• Expanded use of Special Drawing Rights (SDRs) through the IMF.

• Regional currency unions.

• Multilateral payment systems independent of dollar or yuan hegemony.

• A diversified reserve currency basket, rather than a single dominant currency.

The world is overdue for a new currency architecture—one that reflects a more multipolar, interconnected, and equitable global economy. But until the U.S. relinquishes some control and China embraces reform, the rest of the world remains caught in a financial no-man’s-land.

And that’s a recipe for continued instability—especially for those with the least margin for error.

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The Dollar

Dominant and dangerous
As America’s economic supremacy fades, the primacy of the dollar looks unsustainable

IF HEGEMONS are good for anything, it is for conferring stability on the systems they dominate. For 70 years the dollar has been the superpower of the financial and monetary system. Despite talk of the yuan’s rise, the primacy of the greenback is unchallenged. As a means of payment, a store of value and a reserve asset, nothing can touch it. Yet the dollar’s rule has brittle foundations, and the system it underpins is unstable. Worse, the alternative reserve currencies are flawed. A transition to a more secure order will be devilishly hard. ......... The United States accounts for 23% of global GDP and 12% of merchandise trade. Yet about 60% of the world’s output, and a similar share of the planet’s people, lie within a de facto dollar zone, in which currencies are pegged to the dollar or move in some sympathy with it. American firms’ share of the stock of international corporate investment has fallen from 39% in 1999 to 24% today. But Wall Street sets the rhythm of markets globally more than it ever did. American fund managers run 55% of the world’s assets under management, up from 44% a decade ago.......

the costs of dollar dominance are starting to outweigh the benefits.

..... In recent months the prospect of even a tiny rate rise in America has sucked capital from emerging markets, battering currencies and share prices. .... Decisions of the Federal Reserve affect offshore dollar debts and deposits worth about $9 trillion. Because some countries link their currencies to the dollar, their central banks must react to the Fed. Foreigners own 20-50% of local-currency government bonds in places like Indonesia, Malaysia, Mexico, South Africa and Turkey: they are more likely to abandon emerging markets when American rates rise. .......

America is the biggest export market for only 32 countries, down from 44 in 1994; the figure for China has risen from two to 43.

A system in which the Fed dispenses and the world convulses is unstable....... A second problem is the lack of a backstop for the offshore dollar system if it faces a crisis. In 2008-09 the Fed reluctantly came to the rescue, acting as a lender of last resort by offering $1 trillion of dollar liquidity to foreign banks and central banks. The sums involved in a future crisis would be far higher.

The offshore dollar world is almost twice as large as it was in 2007. By the 2020s it could be as big as America’s banking industry.

Since 2008-09, Congress has grown wary of the Fed’s emergency lending. Come the next crisis, the Fed’s plans to issue vast swaplines might meet regulatory or congressional resistance. For how long will countries be ready to tie their financial systems to America’s fractious and dysfunctional politics?........ America increasingly uses its financial clout as a political tool. Policymakers and prosecutors use the dollar payment system to assert control not just over wayward bankers and dodgy football officials, but also errant regimes like Russia and Iran. Rival powers bridle at this vulnerability to American foreign policy. ........ If the Fed fails to act as lender of last resort in a dollar liquidity crisis, the ensuing collapse abroad will rebound on America’s economy. ....... If foreigners continue to accumulate reserves, they will dominate the Treasury market by the 2030s. To satisfy growing foreign demand for safe dollar-denominated assets, America’s government could issue more Treasuries—adding to its debts. Or it could leave foreigners to buy up other securities—but that might lead to asset bubbles, just as in the mortgage boom of the 2000s. ........ The baton of financial superpower has been passed before, when America overtook Britain in 1920-45. But Britain and America were allies, which made the transfer orderly. And America came with ready-made attributes: a dynamic economy and, like Britain, political cohesiveness and the rule of law ........ The euro is a currency whose very existence cannot be taken for granted. ......

As for the yuan, China’s government has created the monetary equivalent of an eight-lane motorway—a vast network of currency swaps with foreign central banks—but there is no one on it.

Until China opens its financial markets, the yuan will be only a bit-player. And until it embraces the rule of law, no investor will see its currency as truly safe. ........ More likely is a splintering of the system, as other countries choose to insulate themselves from Fed decisions by embracing capital controls. The dollar has no peers. But the system that it anchors is cracking.

Banking and nothingness
Europe’s dithering banks are losing ground to their decisive American rivals

Seven years after the height of the financial crisis, Europe’s large banks still behave as if they are in the thick of the storm. Plans for radical restructurings are shelved before they are even implemented, often accompanied by management defenestrations—Barclays is one of four big European banks with new leaders. And they have dithered on the most basic questions, for example on how much capital they need or whether to scale back misfiring investment-banking arms. ..... Europe’s banking market is fragmented and includes politically controlled lenders, such as Landesbanken in Germany, which sap profits for everyone. ....... Few seem to mind tapping a Goldman Sachs or Merrill Lynch for operations that require global reach. That may annoy European bankers, but is hardly a reason to mollycoddle them. If their investment banks cannot pay their way under the current rules, it is the banks that must change, not the regulations.