Greenback still holding sway amid geopolitical tensions

THE position of the US dollar's status as the world's reserve currency is again under scrutiny after the freezing of Russia's central bank reserves earlier this month. Is this going to be an inflexion point, even if the asset freeze was done not by the US alone but in concert with Europe, Canada, Britain and Japan? And how did we get here?

In 1971, US President Richard Nixon ended the US dollar's link to gold. The greenback duly sank and triggered inflation. Then Washington figured out a way to ensure a constant demand for US dollars. Then US Secretary of State Henry Kissinger was dispatched to Saudi Arabia to offer this deal - US military protection in return for crude oil being traded exclusively in the greenback. Other Arab oil producers joined up with similar deals. The Saudis were to recycle billions of excess dollars into US treasury bills and other dollar-denominated assets. This meant a steady demand for US debt. This is what keeps global demand for US dollars high and underpins the US dollar's role as the world's reserve currency.

It was an arrangement that kept both sides happy for decades. But Saudi Arabia's relationship with the US has frayed in recent years by differences ranging from their positions in Yemen's civil war to Washington's proposed deal on Iran's nuclear programme, as well as statements from the Biden administration about top Saudi leaders.