A big question mark hangs over the meeting of the world’s leading central bankers this week in Sintra, Portugal: Is the US dollar-centric monetary system heading for collapse?
The governors of the central banks of the US, Eurozone, UK, Japan and South Korea are meeting to discuss global trade tensions, ongoing conflicts in the Middle East and the impact of economic policies on inflation and growth. But beyond these short-term issues, the main topic to be discussed behind the scenes of the meeting is even deeper:
Could US President Donald Trump’s unpredictable and protectionist economic policies threaten the global financial order that has been dominated by the dollar for over 80 years?
BNP Paribas chief economist Isabelle Mateos y Lago, who will also be attending the forum, says:
“Everyone is trying to understand what kind of world we are heading towards. They are probably aware that they will not get clear answers in the short term. The real question is: How do you manage monetary policy in such an unpredictable environment?”
Critical Panel on Tuesday: Eyes on Powell and Lagarde
Investors are expecting guiding statements from the panel to be held on Tuesday afternoon, featuring US Federal Reserve (Fed) Chairman Jerome Powell, European Central Bank (ECB) President Christine Lagarde, and the central bank leaders of Japan, the United Kingdom, and South Korea.
Powell, who has resisted Trump’s pressure for interest rate cuts, may be in the most difficult position at this meeting. Any sign that the Fed’s independence is being weakened by the White House could undermine the dollar’s credibility as a global reserve currency. Although Powell’s position has been strengthened by a recent US Supreme Court decision, disagreements are growing within the Federal Open Market Committee (FOMC).
It is being discussed that Trump may announce Powell’s successor sooner, even though his term runs until May 2026. Investec economists warn that a change to someone closer to Trump could damage the Fed’s neutrality and destabilize the dollar.
Due to such uncertainties, the dollar has fallen to 1.17 against the euro, its lowest level in almost four years.Is This an Opportunity for the Euro?
ECB President Christine Lagarde is now in a new position: positioning the euro as a stable and reliable global currency. While former ECB president Mario Draghi once answered questions about whether the euro could survive, Lagarde is now trying to turn this period into an opportunity, describing it as “the euro’s moment.” Despite past doubts, Lagarde and many economists believe that the EU needs to strengthen its fiscal, economic, and military integration if it wants to challenge the dominance of the dollar. Recent surveys show that 16% of central banks plan to increase their euro reserves in the next 12 to 24 months, making the euro the most popular alternative currency. However, it is still quite far behind compared to the dollar and gold.
“I haven’t been this optimistic about Europe in a long time, but that doesn’t guarantee success,” says Mateos y Lago of BNP Paribas.
Other Central Banks Also Face Difficult Questions
OppositeThe central bank governors of Japan, South Korea and the UK are also grappling with various economic difficulties:
- The Bank of Japan is hesitant to raise interest rates due to the impact of tariffs that the US may impose.
- The Bank of Korea may be forced to end its current interest rate reduction process due to the sudden boom in the housing market.
- The Bank of England is struggling with inflationary pressures triggered by high wage increases, despite signs of a slowdown in the labor market.
KBRA European Macro Strategist Gordon Kerr summarizes this situation as follows:
“Disagreements are increasing both in voting and in economists’ analyses. Everyone needs to stay alert and react quickly.”
The Future of the Global Monetary System Remains Uncertain
This high-level meeting in Sintra goes beyond topics such as inflation or interest rate decisions, raising the question of whether the global monetary order will be reshaped. The future of the dollar and the possibility of a multipolar financial system are likely to be the main topics of discussion not only this week but also in the coming years.
