Is a post-dollar world coming?

This is an audio transcript of the FT News Briefing podcast episode: Is a post-dollar world coming?

Marc Filippino
Good morning from the Financial Times. Today is Tuesday, September 13th, and this is your FT News Briefing.

[MUSIC PLAYING]

US inflation is expected to have eased in August. And we’ll hear from a guest columnist who envisions a world where the dollar is no longer the dominant currency. Plus, Ukrainian troops have regained momentum and changed the narrative in the war with Russia. I’m Marc Filippino, and here’s the news you need to start your day.

[MUSIC FADES]

The US government is out with its latest inflation numbers today. Economists expect the August consumer price index will show the pace of price rises will have slowed a bit. But the FT’s Colby Smith says that may just reflect the lower gas prices.

Colby Smith
More broadly, what we really need to be looking at are these month-over-month metrics and inflation once we strip out volatile prices that are related to energy and food as well. So when we do that, it’s a little bit more of a worrying picture that’s forecasted to show is a 0.3 per cent increase between July and August. Now, on an annual basis, that’s going to translate to a 6.1 per cent increase, and that’s up from the annual pace that was recorded during the previous period.

Marc Filippino
So if I hear you right, anyone who hopes that today’s numbers will make the Federal Reserve ease up on aggressive rate hikes when it meets next week, those people are going to be disappointed.

Colby Smith
So for the Fed, what they really need to see is more substantial evidence that inflation is coming down, and this August report is just not going to be sufficient to change their view.

Marc Filippino
Colby Smith is the FT’s US economics editor.

[MUSIC PLAYING]

The Fed’s rate hikes have helped strengthen the US dollar, and right now the dollar is the strongest it’s been in 20 years. But that may not last. Ruchir Sharma is the chair of Rockefeller International, and he thinks we’re headed for a post-dollar world. He wrote about it recently in the FT, and he joins me now to lay out his case. Hi, Ruchir.

Ruchir Sharma
Hi.

Marc Filippino
All right. So why do you say that the dollar is on its way out? Many people have predicted the demise of the dollar before. What is unique about right now?

Ruchir Sharma
Right. So, in fact, America had never been a financial superpower like this before. In fact, it’s possible that in entire economic history, we have never had such a powerful financial superpower, which is in terms of how widely the dollar is used, how big the American stock market is as a share of the global stock market. And the point I make now is that we may be close to a peak because it is so hard for America to further expand its financial and even economic footprint from this standpoint. But I think there’ll be two or three very important events which set in motion a potential decline in the US dollar.

Marc Filippino
Yeah. Can you talk about those?

Ruchir Sharma
So I think that one of them has to be the way that America had to use sanctions against Russia earlier this year, which is to sort of take Russia off the global payments system because until then 90 per cent of all transactions in the world involve the US dollar. It caused a lot of concern in many other countries, from China to even India and then other countries, that something similar could happen to them as well. And they cannot be this reliant on the dollar. So one thing which is going on is that a lot of these countries are beginning to sign bilateral agreements, create smaller regional blocs where they’re able to trade and exchange currencies which are in their own sort of currencies rather than being able to transact everything to the US dollar.

Marc Filippino
Now, you also mentioned that there are cyclical reasons for the dollar’s decline.

Ruchir Sharma
Typically when the dollar has become so expensive, it’s had a downtrend. This happened even in the 2000s when it was at a similar valuation point in 2001-2002, after the tech bubble burst. A lot of people rushed to the US dollar as a safe haven. After that, too, the dollar began a decline, which lasted right up until the global financial crisis of 2008. The US current account deficit is already expanding and reaching levels close to 5 per cent of GDP, which is very unusual for a country like the United States to run such a large gap compared to the rest of the world. So the dollar is becoming very expensive, and countries are moving away from their great dependence on the US dollar. I think all these factors are coming together at the same time, and in the coming few years the US dollar is likely to be declining rather than rising.

Marc Filippino
If not the dollar, is there then no dominant currency or does the world move to a different dominant currency?

Ruchir Sharma
So this time I suspect that we will see many smaller regional blocs. We are already seeing that if you look at the foreign exchange reserve holdings of countries around the world, that the Australian dollar, the Canadian dollar, the Swiss franc, these currencies are all gaining in terms of their share of global central banks and where they are holding their foreign exchange reserves. The dollar’s share is declining, but it’s not the Chinese currency that is taking up its share necessarily, but it’s these other smaller blocks that’s taking up. So, yes, it’s smaller currencies, smaller regional blocs. That’s what’s happening rather than the historical template where one big currency declines and another big currency takes over.

Marc Filippino
Ruchir Sharma is the chair of Rockefeller International. He’s also a regular columnist for the Financial Times. Thanks, Ruchir.

Ruchir Sharma
Thank you.

[MUSIC PLAYING]

Marc Filippino
In the war in Ukraine, the tables may have turned. It had looked like Russia and Ukraine were locked in fighting that would grind on through the winter. But in the past week, Ukraine mounted a lightning offensive. Its troops recaptured huge swaths of territory and sent the Kremlin’s forces fleeing. The FT’s John Paul Rathbone sees some key factors in Ukraine’s success.

John Paul Rathbone
First of all, the Ukrainians had made a big song and dance about another offensive they were going to launch in the south around Kherson. And the Russians moved some troops down there. So in the north-east around Kharkiv where this attack happened, they were quite thinly spread. The second point is the Ukrainian plan, which essentially involved the rapid advance that would capture Russian logistic bases, it essentially removed or degraded the artillery advantage that Russia has because they need massive amounts of logistical support to move the artillery shells that the Russians have been using to outshell the Ukrainians. And then the third and perhaps the most important aspect is the state, the relative state of morale. The Russians are fighting a war of choice, Putin’s choice, that very few soldiers understand, and the Ukrainians are fighting a war of necessity.

Marc Filippino
And JP says that this offensive has also changed the narrative.

John Paul Rathbone
The way the Ukrainians see it, and I’m speaking from Kyiv, is, of course, the recapture of territory is really important and it boosts morale. But in terms of military strategy, it’s not so much about regaining territory. What you’re doing is degrading and corroding the Russian will to fight and instilling the idea in the military commanders that maybe this war cannot be won. And this isn’t an abstract notion for a soldier. It’s a question of life and death.

Marc Filippino
JP Rathbone is the FT’s defence and security correspondent.

[MUSIC PLAYING]

Before we go, China’s President Xi Jinping is travelling to central Asia this week. It’s his first trip outside the country since the coronavirus pandemic broke out. And it’s expected to be the first of many high-level meetings over the next few months as Xi tries to reassert Beijing’s global influence. On this trip, he’ll meet with friends and allies, including Iran’s President Ebrahim Raisi, and Russia’s President Vladimir Putin.

[MUSIC PLAYING]

You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.