The U.S. emerged out of the ruins of World War II as the world’s hegemonic power. Although the world had divided in political terms back then as the “democratic world” backed by the U.S., and “communist world” backed by the USSR, the U.S. apparently was the “sole” hegemon of the world in terms of economic power and financial outreach. The extent of the economic and financial power of the U.S. was so great that no empire or state the world had seen before could be compared to it. Therefore, we can easily conclude that the most powerful state the world has ever seen by now is certainly the U.S.

As a direct result of this rather unique situation in world history, the U.S. almost singlehandedly shaped the economic and financial system of the world in the immediate aftermath of the Bretton Woods meetings. Although several countries other than the U.S. participated in these meetings, their effect on the final outcome and “agreement” was rather limited. To add insult to injury, the unique and central place of the U.S. dollar in the emergent Bretton Woods system was “never” discussed in the meetings and added to the final agreement by the U.S. itself singlehandedly as if it was a second thought. Yes, because the U.S. was the hegemonic power of the world, its national currency, dollar, became the international reserve currency without any discussion. Other countries had no other option other than to sign this final “agreement.” In the final analysis, it is the U.S. itself who was ruling the roost.

Back then, the unique and central place of the U.S. dollar in the emergent Bretton Woods system was “never” discussed because the U.S. was the hegemonic power of the world.

However, we are not living in such a polarized world in terms of economic/political power. The extremely polarized economic world between 1940s and 1970s gave way to an increasingly multi-polar world and the economic center of the world shifting towards Asia rapidly. That said, the U.S. is still the most powerful country in the world. However, this is not enough to dominate the whole world in economic and financial terms.

The relative power of the U.S. has decreased tremendously since the 1970s and particularly since 1990s. And this has been what had to happen. The world needs to get “flat.” You cannot sustain a world in which some countries have the upper hand indefinitely. Sooner or later things have to change. And we are in this transition right now. It will be very slow to human eyes, but very rapid from the perspective of history.

The share of the U.S. in the world economy was a staggering 40 percent in 1950 according to market prices. It is 24 percent right now. On the other hand, the share of the U.S. economy according to purchasing power parity (PPP) has declined from 27 percent to 15 percent. So, according to both market prices and PPP, the economic power of the U.S. diminished dramatically.

I can assert that we are living in a watershed period, which will shape the future trajectory of the world.

Actually, China has surpassed the U.S. in 2013 and became the biggest economy in the world according to PPP, and it will be so in terms of market prices in the very near future. So, I can easily assert that we are living in a watershed period, which will shape the future trajectory of the world.

This general framework signals that the unique role of the U.S. dollar will cease to exist in the foreseeable future. This will not happen anytime soon, but it will happen. In a world in which several countries are competing with each other in economic, political and financial terms, a single country could not impose its will as easily as it was the case in the 1940s, where the U.S. was dominating so thoroughly. More to the point, with a diminished relative power, the U.S. cannot afford its national currency to play an international role. Yes, this was the case up until now, but the U.S. will find it increasingly harder and troublesome as its relative economic power dwindles.

We attested that in the last years the U.S. has been using the dollar and U.S.-controlled payment system, as a weapon to promote its political goals. Financial attacks against the Turkish Lira, sanctions against China, Russia and Iran can benefit the U.S. politically or look so to an extent in the short/est term. However, this inconveniently hawkish and shortsightedly bold standing is a colossal mistake for the U.S., which will only expedite the transition from the existing financial/commercial system to another one waiting to emerge.

Using the US Dollar and US-controlled payment system is inconveniently hawkish and shortsightedly bold standing as well as a colossal mistake for the US.

The “rise” of the currency swap agreements between countries around the world is just first steps on the way to a new global economic/financial order. China, Russia, India, Japan and other countries are signing billions of dollars’ worth swap agreements in an effort to use national currencies more in bilateral trade. This is de-dollarization in action. And it will continue to morph into a much broader and bolder multilateral trade agreements in the long run. I now shall answer the question I asked on the title: The future of the U.S. dollar is to revert to a national currency role without a unique place in the global economy/finance.

China, Russia, India, Japan and other countries are signing billions of dollars’ worth swap agreements in an effort to use national currencies more in bilateral trade. This is de-dollarization in action.

This is inevitable.

Then, what will replace the U.S. dollar? Another national currency? Not necessarily. A multi-polar world cannot afford a national currency acting an international currency. This holds for the U.S. dollar and also for… the Chinese yuan. In a multi-polar world, international trade will most probably be conducted via regional clearing unions, which could eventually give way to the international clearing union. And these regional clearing unions will have union-specific supranational currencies such as Bancor, which could eventually coalesce into the international “abstract” currency of the world.

However, this slump was a surprise to many in the sense that the TL has been one of the worst performers among the currencies of the emerging countries, though the economic and financial outlook of Turkey by no means warranted such a grim outcome. This was not the end of the story, though. After having decreased by around 4 percent against the USD, the TL has plunged by around 10 percent less than two weeks into 2017, reaching around 3.90. This plunge was so sharp in the sense that it eclipsed the “considerable” depreciation that happened just two months earlier with its pace. Such a sharp depreciation requires a very good explanation, yet there was none. It seems that the reason behind the bulk of the depreciation of the TL lies not in the economic but in the political sphere, which amounts to some sort of a speculative attack with “political strings” attached.At what level will the TL/USD parity stabilize? This question is hard to answer since financial movements are extremely unpredictable given the speculative nature of financial markets, particularly as there is a rather weak link between the recent depreciation waves and underlying economic causes to it, if any, though some useful and informed remarks can be made.It is interesting to have a look at the historical course of the TL against the USD (Figure 1). For the period stretching from 1982 to 2002, the TL was extremely undervalued against the USD with a parity of 4.04 on average. However, in the second period of 2003-2015, the opposite was the case: the TL was extremely overvalued against the USD with an average parity of 2.57 due to a positive global economic outlook until the 2008 financial crisis and global liquidity abundance in the 2000s. According to my calculations; given the inflation rates, policy interest rates and other important factors of both countries and from the perspective gained from the course of the TL/USD parity in the last four decades, the TL/USD parity should be around 3.30 as of January 2017.

After an average parity of 2.54 in 2014, which was well in line with the broader pattern experienced in the period of 2003-2015, the USD gained value against the TL considerably in 2015, ending up with a parity of 2.96, though this rate was still low according to historical standards.

In the first ten months of 2016, the parity hovered around this level with an average of 3.00, which was followed by a sharp depreciation for the TL in November 2016, allegedly due to Donald Trump’s election and growing interest rate hike expectations, as mentioned before.

However, the TL lost value in considerable excess of most of the currencies of emerging countries, raising doubts regarding the reasonability of so-called economic causes for such depreciation. The TL closed 2016 with a 14 percent loss in the last two months against the USD. However, this was not the end of the story.

Even though many had expected a bouncing back of the TL, it has further lost value against the USD in the first few days of 2017, this time with a vengeance, causing great surprise. In just a few days, the TL has lost its value against the USD by 9 percent with no apparent “economic” reason. So, in these days Turkish people, while trying to understand what has been going on, wonder what will come next.

From an historical standpoint, it is clear that the TL is now rather undervalued against the USD, with no good reason at least economically. In the 1980s and 1990s the TL was extremely undervalued against the USD, but there were good economic reasons behind it, for example a tight monetary policy and concomitant high policy interest rate of the Fed particularly in the first half of the 1980s, but also occasionally in the 1990s, not to mention very high average inflation rates in Turkey for the whole period.

Actually, for example, the US 10-year Treasury rate was much higher in the 1980s and 1990s, than in the 2000s and particularly after the 2008 global financial crisis. This rate was above 8 percent at large for the 1980s, above 6 percent generally for the 1990s, and above 4 percent prior to the 2008 global financial crisis. Now, it stands at around 2.4 percent. It means that while for almost 4 years the Fed has been discussing an increase in the policy interest rate, it has still been in historically low levels.

On the other hand, the Turkish economy is now much stronger than in the 1980s and 1990s. Inflation has been stabilized in the first half of the 2000s after four decades of turbulence. The public debt to GDP ratio has been in its historically low levels for more than a decade. The fiscal discipline of Turkey is enviable for most of the countries in the world. The Turkish banking sector is in a very good shape and rather strong. There is no problem of currency mismatch at large for Turkish corporations, as they have been sitting on a considerable amount of US dollars to hedge themselves for their operations.

With no strong economic reason for the depreciation of the TL, it is rather apparent that this rather swift loss of value is mostly speculative, to say the least. Therefore, under these economic and financial circumstances, one can reasonably expect that the possibility that the TL will gain considerable value is much higher than the other way around.

In fact, it is very hard for the currency to stay where it is now. (Indeed, it decreased sharply from over 3.90 to about 3.70 in just two days.) So, once the speculative wave fades away, then can we see a sharp decline in the TL/US parity. Until where? Well, one can expect first around 3.60s and then 3.30s.

One final word of caution: speculative attacks against the TL could go on until the presidential system referendum, which is expected to be held in April 2017. However, this does not mean that the TL will further lose value against the USD, since it is very hard to keep a currency artificially depreciated for a long time. One can expect that the TL will gain value moderately in the months to come and find its economically viable place after the presidential election.