Jim O'Neill: The dollar's clout in global finance is 'idiotically' outsized

  • America’s share of world GDP currently sits at 18 percent, down from 30 percent at the end of World War Two. China’s share, meanwhile, has quadrupled to 16 percent, and emerging markets constitute 60 percent of global output.
  • But ever since the post-war Bretton Woods arrangements institutionalized the dollar as the world’s main reserve currency, it remains dominant: some 60 percent of countries, accounting for 70 percent of global GDP, use the greenback as their anchor currency.

Jim O'Neill does not approve of the U.S. dollar's kingpin status in global markets.

Speaking on CNBC's "Squawk Box Europe," the man who coined the term BRICs for the emerging economies of Brazil, Russia, India, China and South Africa expressed his continued frustration at the longtime economic convention.

"We live in this very peculiar situation where the role of the dollar in global finance is just idiotically more important than the U.S. economy. So, if a strong economy translates directly into a higher dollar, some of these things just sort of follow like night and day," he said.

O'Neill, chair of Chatham House and former chairman of Goldman Sachs Asset Management, was referring to the emerging markets selloff that began last spring as the U.S. dollar gained in strength following interest rate hikes and policy tightening from the Federal Reserve.

In particular, a more robust dollar hurts emerging markets that have taken on significant dollar-denominated debt, as it means that debt is now more expensive to pay off. Since the 2008 financial crisis, the level of dollar-denominated debt in emerging economies' non-banking sectors has doubled.

For those countries dependent on easy foreign capital — like Turkey, among others — O'Neill outlined the already visible consequences: "If this carries on in the U.S., some of those places are going to struggle."

Claudio Borio, head of the monetary and economic department of the Bank of International Settlements, agrees. As a reversal in risk appetite sees liquidity flowing out of emerging markets and into US securities, "a further appreciation of the dollar would exacerbate vulnerabilities in emerging market economies," he said in August.

These vulnerabilities include being more exposed to international capital flows, especially in dollars. With some major exceptions such as India and China, emerging markets also tend to be commodities exporters, and commodity prices generally move inversely to the dollar.

"The kingpin role of U.S. policy and the dollar in world finance is an issue, and the U.S. economy, over (the last) 30 years, has gone to less than 20 percent of world GDP (gross domestic product) and yet the dollar is seemingly playing this dramatic role," O'Neill said.

Indeed, America's share of world GDP currently sits at 18 percent, down from 30 percent at the end of World War II. China's share, meanwhile, has quadrupled to 16 percent, and emerging markets constitute 60 percent of global output.

But ever since the post-war Bretton Woods arrangements institutionalized the dollar as the world's main reserve currency, it remains dominant: some 60 percent of countries, accounting for 70 percent of global GDP, use the greenback as their anchor currency. And the proportion of U.S. assets, particularly Treasurys, in central banks' foreign exchange reserves — as well as the level of international trade invoiced in dollars — continues to highlight this dominance.

What this has done, some experts point out, is created a dichotomy between onshore and offshore dollar economies. The offshore dollar economy is seeing significant liquidity removal that's biting in some countries and spurring concern among investors. Meanwhile, the onshore dollar economy is still very liquid, with positive economic data heralding more Federal Reserve tightening, thereby creating a negative feedback loop for offshore emerging economies as it keeps the dollar moving higher.

The Turkish lira, Indian rupee and Indonesian rupiah, among others, have all hit record lows in recent weeks — although it's important to note that certain cases, like Argentina and Turkey, are also suffering the consequences of their own unique policy actions.

O'Neill is not the only analyst who seems tired of the dollar. European countries have of late been in discussion with Russia and China, floating the idea of using alternate currencies for oil trading to avoid U.S. secondary sanctions placed on Iran in the wake of Washington's withdrawal from the Iran nuclear deal.