The Taliban and the Dollar
In the half-century since US President Richard Nixon closed the curtain on the Bretton Woods system, the US dollar has been the dominant global currency, largely because there were no other aspirants to the throne. Nonetheless, recent events have reminded us that conditions can change both gradually and suddenly.
LONDON – This month marks the 50th anniversary of the end the Bretton Woods system, when US President Richard Nixon suspended the US dollar’s convertibility into gold and allowed it to float. We are also approaching the 20th anniversary of the Taliban’s removal from power in Afghanistan at the hands of US-led coalition forces. Now that the Taliban has again prevailed, we should consider whether its victory over the world’s most powerful military and largest economy will have any implications for the dollar and its role in the world.
Looking back over the 50 years since Nixon closed the gold window (39 of which I spent being professionally engaged in financial markets), the biggest takeaway is that the floating-exchange-rate system, and the dollar’s dominant role in it, has turned out to be more robust than initially expected. Even knowing what we know now about the evolution of the world economy, most experts would have doubted that the system could survive for as long as it has.
Given this resilience, it is tempting to dismiss America’s failure in Afghanistan as inconsequential for the dollar. After all, the greenback weathered the fall of Saigon in 1975 and the debacle in Iraq following the US invasion in 2003. Why should this time be any different? Ultimately, the answer depends on one’s expectations about the evolution of the world economy and the behavior of its principal financial players, namely China and the European Union.