In the meeting, Central Bank of England Governor Mark Carney pointed to the need for the world’s central banks to join together to change the current composition of foreign exchange reserves, criticizing dollar’s “destabilizing” role in the world economy at this juncture. He even suggested central banks should consider joining forces to create a virtual currency based on a network of digital central-bank currencies that could ease the global economy’s reliance on the dollar and be used to facilitate cross-border trade and international payments.

For months now, as a result of the intensification of US-China trade war and tension-creating US policies against Russia, world economy has become more disturbed than ever before and experts have forecast that sliding into recession is likely,

The Central Bank of England governor also believes the dollar’s dominance of the global financial system increased the risks of a liquidity trap of ultra-low interest rates and weak growth.

He who had predicted the Chinese yuan or a digital currency would soon replace the dollar as the world’s dominant currency, also said: “While the world economy is being reordered, the U.S. dollar remains as important as when Bretton Woods collapsed.” He was referring to the end of the dollar’s peg to gold in the early 1970s.

What threat is there to the current dominant financial and economic system that America’s longtime ally Britain has so openly called for an end to “dollar domination”?

Expressing concern over the future of the world economy has not been new in recent years.

Earlier, the International Monetary Fund, in its assessment of the global economy in October last year, had warned that the trade war risked making the world a “poorer and more dangerous place,” saying a full-blown trade war between the two countries would put a significant dent in economic recovery. If this war is spread more, its detrimental effects will not only target businesses and industries but will directly affect households.

The dominant monetary order, however, has gone through many ups and downs since the beginning.

Seventy five years ago in 1944 and amid the World War II, representatives of 44 countries gathered together in Bretton Woods, New Hampshire, United States, to  regulate a new international monetary order.

At that time, the United States not only was present in the military operations as the superior power, but also introduced its economy as a world-class, successful economic model.

Under such circumstances, the Bretton Woods Conference provided the US dollar with a key role in global business transactions and in the new global economic architecture.

At the conference, an agreement was signed, according to which the signatory countries agreed to keep their currencies’ value against the dollar fixed with little interest. The agreement pegged the value of other nations’ currencies to the U.S. dollar, which, in turn, was pegged to the price of gold, fixed at $35 an ounce. If a country gave $35 million to the United States, the latter was obliged to give that country one million ounces of gold.

The crises resulting from the collapse of the Bretton Woods system in 1971, however, are not to be forgotten.

Following the Vietnam War, the US balance of payments deficits caused that a large amount of dollars would be in the hands of creditor countries such as Japan, Taiwan, South Korea and even France and Germany. These countries decided to give the US dollars to the United States and get gold in return. As the amount of the dollars were high, the gold existing in the US did not suffice.

So in 1971, the Bretton Woods monetary system collapsed, and President Richard Nixon unilaterally severed the link between the dollar and gold. He announced the temporary suspension of the dollar’s convertibility into gold and said he was not obliged to do that.

It is against this backdrop that the Bank of England governor said today the high reliance of world countries to the US dollar has exposed many countries to damaging spillovers from swings in the US economy and urged the countries to think about the issue more and find a solution to it.

After the collapse of Burton Woods and in 1976, the Jamaica Accords officially ended the principle of fixed parity system and recognized the end of any reference to gold in the international monetary system, and from then on, currencies turned into commodities whose parity rates were determined on a daily basis and according to supply and demand in global currency market in the midst of international economic transactions. The dollar, however, did not lose its power in the international monetary arena yet.

At the end of World War II, the United States was the only major economic power in the world. For decades, economists have believed that if the US economy has fever, the European economy would shake and the Asian economy would die! But a lot has changed today in the international arena.

Concern in the world’s financial centers intensified as a result of the escalation of trade war between China and the US, heightening of political tensions between the US and Russia, and political crises in Europe and the relative optimism and confidence previously seen in the international economic atmosphere more or less, were replaced by pessimism, hesitation and concern.

With the announcement of Donald Trump’s victory in the US presidential elections in 2016, as a head of state who had defined the pillars of his economic, political and military policies as being aggressive and retaliatory, plummeting of stock indexes in some of the world’s most prestigious stock markets indicated the fear of emergence of a new economic crisis.

In fact, the US president’s determination to fight simultaneously in all arenas with the aim of realizing the slogan of “America First” ​​which he had announced during his election campaign without showing a proper understanding of the changing international conditions, has faced the world economy with serious challenges.

That is why Mark Carney has said the problems in financial system were encouraging protectionist and populist policies.

The escalation of economic tension between the United States and China and Russia in recent months has prompted the two countries to sell US Treasury bonds extensively in order to reduce their dependence on the dollar. China in recent months has been the world’s largest importer of gold after Russia.

Other countries have dumped dollar in the past few months in order to stay immune from these tensions. In fact, the US-China economic dispute has also led investors towards secure reserves.

At the same time, Trump’s trade threats more than anything else have caused the US dollar to depreciate.

According to the Reuters, after US Federal Reserve Chair Jerome Powell acknowledged the huge impact of the trade war with China on US economic growth and at the same time failed to take a clear stance towards further interest rate cuts, Donald Trump in a series of extremely harsh and unprecedented attacks, labelled him a greater enemy of the United States than Chinese leader Xi Jinping! He told reporters, “If Fed chair wanted to resign I wouldn’t stop him.”
Trump had written on Twitter previously: “As usual, the Fed did NOTHING! It is incredible that they can ‘speak’ without knowing or asking what I am doing, which will be announced shortly”. “We have a very strong dollar and a very weak Fed. I will work ‘brilliantly’ with both, and the U.S. will do great.” “My only question is, who is our bigger enemy, Jay Powell (US Federal Reserve Chair) or Chairman Xi (Chinese leader)?”

The US president, who had so far denied any warnings about the negative growth of economic indicators and the devaluation of the dollar, also said he was preparing a plan that would affect both the Fed and the value of the dollar. Of course, he did not specify the details of what he wanted to do.

While continuing his attacks on China, he said in a subsequent Twitter post that he would respond later to China’s announcement that it would impose additional tariffs on U.S. imported products. He then ordered American companies to immediately start looking for an alternative to China and cut ties with China as soon as possible.

Minh Trang, senior foreign exchange trader at Silicon Valley Bank in Santa Clara, California commented, “Powell’s comments basically reiterate a lot of what we have been discussing. That the economy is doing relatively well overall, but there are a lot of challenges and headwinds that are coming our way potentially. I think you could read that in the minutes of the last meeting. The rate cut was more or less an insurance cut to kind of forestall some of these potentially significant headwinds even though the economy is overall doing pretty solid. There is a disconnect between the expectations of the market and what the messaging from the Fed is.”

In recent years, China, as a major producer country, has started a decisive race to boost its exports by depreciating of Yuan. The United States and some developed nations find themselves at a disadvantage in this race. Trump has taken advantage of any opportunity to voice the strongest criticism in this respect to the Chinese. He had said that he was the one who stood against unequal balance of trade with China because there should have been someone to stop China.

China is not refraining from any move in this currency and trade war. The country announced it hoped the Americans would not make a wrong business decision. It, however, is completely ready to face any scenario.

There are a number of reasons for fear of a massive recession in the global economy, the most important of which is the considerable spread of tension in global trade arenas. While these disputes last week pushed the yuan to its record low in the past eleven years, yet the ensuing tensions would have far-reaching effects on the current world monetary system, which is deeply controlled by the dollar.

On the other hand, the current floating system has created the opportunity for the United States to transfer its domestic issues to other countries through the depreciation of the dollar, issues that are generally associated with hegemony over other countries which even have many domestic critics under the current situation.  It is not without reason that the world economic circles are thinking whether the dollar domination could be ended or Washington would be prevented from imposing its will on other nations, relying on the power of its national currency.

It is not easy to find an answer to this question because the most important issue is finding one or more alternatives to the dollar.

The Chinese national currency, the yuan, may be the only currency that can claim to counter the US authority. Many experts, however, believe that this currency does not enjoy the capability to be converted to other currencies. That is why the Bank of England governor had said the transition from dollar to another currency would not be quick!