The US dollar has been the world's reserve currency since World War II, but a combination of political and economic reasons are slowly eroding its supremacy. According to the International Monetary Fund, nearly 60% of international reserves are assets denominated in U.S. dollars. The US dollar is also the most widely used trading currency.
Now, Western-led sanctions against Russia have other countries wary of the potential consequences of reaching beyond Washington. Some countries, including Brazil, Argentina, Bangladesh and India, are preparing backup currencies and assets (such as the yuan) for trade and payments.
Although the macro geopolitical environment has stimulated countries to seek alternative currencies, there has long been unease about the U.S. dollar's huge dominance in global trade and finance. This de-dollarization rhetoric has been coming in waves every few years since at least the 1970s.
Here are three more reasons why countries around the world are trying to make plans to move away from dollar dominance.
1. U.S. monetary policy has too great an impact on other parts of the world
The United States is the issuer of the world's reserve currency and the dominant currency in the international trade and payment system. As a result, the Wilson Center think tank reported in May that it has an outsized influence on the world economy and is often overestimated.
This status provided the United States with what Valery Giscard d'Estaing, French president from 1974 to 1981, called "exorbitant privileges." One aspect of this privilege is that if the U.S. is unable to repay its debt if the dollar depreciates significantly, the U.S. may not be in crisis because Washington can simply print more currency.
This also means that countries around the world must pay close attention to the economic and monetary policies of the United States to avoid spillover effects on their economies. Some countries, including India, say they are fed up with U.S. monetary policy and even say the U.S. is an irresponsible issuer of the world's reserve currency. A working group at India's central bank is currently pushing for the use of the Indian rupee for trade - a stance in line with Prime Minister Narendra Modi's vision for the currency.
2. A strong dollar becomes too expensive for emerging countries
The U.S. dollar has strengthened against most currencies around the world, making imports from emerging countries more expensive.
In Argentina, political pressure and falling exports have led to a decline in U.S. dollar reserves and put pressure on the Argentine peso, which in turn has fueled inflation. This has prompted Argentina to start using yuan instead of dollars to pay for Chinese imports, Argentina's economy minister said on Wednesday, Reuters reported.
"A stronger U.S. dollar could undermine its role as a reserve currency. If it becomes more expensive to obtain U.S. dollars, borrowers will look for alternatives," economists at international financial services firm Allianz wrote in a June 29 note.
Brazilian President Luiz Inácio Lula da Silva has been one of the most enthusiastic supporters of an alternative trade settlement currency, even urging Brazil, Russia, India, China and South Africa to move away from the dollar.
3. Global trade and oil demand are diversifying – petrodollars are at risk
A key reason why the U.S. dollar became the world’s reserve currency was that Middle Eastern Gulf states used it to trade oil—because it was already a widely used trading currency by the time they traded oil.
The arrangement was formalized in 1945, when oil giants Saudi Arabia and the United States reached a historic agreement in which Saudi Arabia would sell oil to the United States exclusively in U.S. dollars. In return, Saudi Arabia will reinvest excess dollar reserves into U.S. Treasuries and companies. This arrangement ensures U.S. security against Saudi Arabia.
But with the rise of the shale oil industry, the United States became energy independent and a net oil exporter.
Allianz economists report: “The structural changes in the oil market brought about by the shale revolution could ironically undermine the dollar’s role as a global reserve currency, as oil exporters play a key role in the dollar’s status and they need to reposition to other countries and their currencies.”
It’s not just about oil prices.
In recent years, the relationship between the United States and Saudi Arabia has been described as akin to "frenemies." Several other issues have become destabilizing, including former President Donald Trump's complaint that Saudi Arabia did not pay a fair price for its defense, and President Joe Biden's criticism of Saudi Crown Prince Mohammed bin Salman. Salman has given the cold shoulder to Washington Post reporter Jamal Khashoggi over his alleged role in the murder. "
Sarah Miller, an editor at Energy Intelligence, wrote in November that such tensions raise the prospect that Saudi Arabia could one day move away from dollar-denominated oil amid the shale energy revolution. Pricing possibilities.
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Indonesia
2023-12-28
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