By Ted Baumann: The international financial system is based on the U.S. dollar. The
greenback is both the world’s “reserve currency” — the one everyone
wants to hold when things go bad — and the principal means of exchange.
The vast majority of transactions between companies, countries and
people are denominated in dollars.
As my investment-oriented colleagues regularly discuss on this page,
the dollar’s dominance isn’t unchallenged. The Chinese yuan, in
particular, has pretensions to become a second global currency, one so
widely used that transactions unrelated to China could be conducted in
yuan.
But there’s another challenge on the horizon … a new international
interbank system that could create important opportunities — or chaos —
for the world economy, depending on how the proverbial ball bounces.
Not So SWIFT
You probably know the SWIFT (Society for Worldwide Interbank
Financial Telecommunication) system as that little jumble of letters and
numbers you need every time you send money to a foreign bank account.
It’s the global banking system’s address book and postal system. SWIFT
has more than 10,000 members in more than 200 countries, and handles
more than 15 million messages daily.
But even though SWIFT is based in Belgium, and subject to EU law, the
U.S. government claims legal authority over all SWIFT transactions
denominated in U.S. dollars — even if those dollars never enter a U.S.
bank account — because they are ultimately “backstopped” by the Federal
Reserve.