A challenge to the US? The dominance of the dollar is safe - for now

Two big international gatherings took place last week. The one that was held in the Rocky Mountain resort of Jackson Hole was a demonstration of the grip the US has on the global economy. The one that was held in Johannesburg was evidence of the challenge posed to the US from the leading emerging market countries.

- Larry Elliott

Let's start with Jackson Hole, where Jerome Powell took centre stage. What the head of the Federal Reserve had to say about interest rates clearly mattered for the US, where the economy has so far emerged relatively unscathed from the severest tightening of policy in four decades. The message was that the battle against inflation was not over and further rate increases were possible.

But, by virtue of the dollar's position as the world's principal reserve currency, what Powell and his colleagues at the central bank do in the coming months affects life well beyond the shores of the US. Commodities such as oil are priced in dollars. Countries that borrow in dollars can see their repayments soar if the US currency rises in value. Countries that run current-account surpluses use the proceeds to buy US Treasury bonds, enabling the US to run massive trade and budget deficits.

There is nothing new in this. It is the way the international financial system has operated since the second world war. Unsurprisingly, Washington wants the status quo to continue because it allows the US to fund its twin deficits without needing to take the tough deflationary action that would be demanded of less privileged countries.