June 2nd, 2023
The dollar influences the global economy. As a result, the United States economy affects the economies of other countries. When America sneezes, the rest of the world catches a cold. ASEAN and BRICS countries contest the dollar power in the global economy.
In April of 2023, the president of Brazil, Lula, stated, “I ask myself why all countries have to base their trade on the dollar? Why can’t we do trade based on our currencies?”. This article will demonstrate the historical ascendance of the dollar, and why some countries are currently discussing moving towards de-dollarization.
Historical Ascendance of the Dollar
The world has had one currency used widely for transactions over the last five hundred years. When the Portuguese dominated trade routes in the 15th and 16th centuries, their currency prevailed. Then, the Spanish currency was followed by the French franc, then the British pound, up until the gradual dominance of the American dollar in the 20th century.
In the 1920s, the dollar started to displace the pound. By 1944, dollars led international trade. In the 1960s, a vast amount of dollars printed resulted in an excessive supply. However, this became detrimental to the dollar, for value depends on scarcity. As a result, in 1981, the dollar lost two-thirds of its purchasing power. In the late 20th century, the US monetary policy affected the rest of the world, as seen during the debt crisis in the 1980s and 1990s. Moreover, the dot-com bubble burst in the 2000s and the 2008 crisis reinforced the unattractiveness of the dollar.
Alternatives to the Dollar
Instead of dollars, countries are increasingly using Yuan as a trading currency. In 2022, China became Brazil’s biggest trading partner–a record of 150.5 billion–both countries traded in their currencies and put the dollar aside. Likewise, since the annexation of Crimea, Russia has prioritized de-dollarization and, with the Russian-Ukraine War, the volume of China-Russia trade in Yuan skyrocketed.
In 2022, Ruble-Yuan trade in Russia's foreign exchange markets corresponded to 39% of total volumes, surpassing the ruble-dollar 34% trade share. The US sanctions on Russia allow for a stronger Chinese foothold on inter-trade. Regardless of countries' current geopolitical stance, noticing the US's ability to cut trade with countries they disagree with makes them an unattractive trading partner.
China provides a more reassuring partnership, prioritizing economic interests supported by prognostics, estimating that the Chinese economy will outpace the US economy in 2030. The Chinese moving away from the dollar and supporting other nations wanting to do the same is tied to geopolitical interests and a desire to move away from a US-dominated global economy.
The United States Bruised Robustness
Moreover, countries fear an American sovereign debt default. The US reaching its debt limit in mid-January threatens the viability of the robustness of the US economy. Imposing a limit for US sovereign debt was established in 1917 to prevent uncontrollable expenses. The limit was reached 78 times since its creation, and once again needs to be raised for the country to continue borrowing and paying off its debts.
Joe Biden has stated that the US has never defaulted on its debt payments and never will. However, a majority in Congress decides whether the debt limit may rise. The Republican opposition in Congress is willing to do so if there is a considerable reduction in public spending. Yet, the democrat president does not wish to reduce the public spending his campaign is founded on.
If the US does not reach an agreement, the country will have to default on its debt payments. In addition, even with an agreement, uncertainty is unfavorable for the US economy. In 2011, the question of raising the debt limit arose, and even with a last-minute agreement, the US solvency decreased from AAA to AA+. Last week the Fitch agency placed the US’s AAA credit rating on negative watch.
Consequently, the US prospect of defaulting on its sovereign debt (a 31.5 trillion dollar national debt) is affecting countries’ confidence in the dollar. The global economy’s ties to the dollar are a significant advantage for the US. Today, 60 percent of the central bank reserves remain in dollars. The majority of corporations, governments, and central banks around the world hold US dollars. Because foreign governments and institutions need dollars, they invest a significant portion of their resources to benefit the US economy instead of their currency to develop their economies.
Cooperation and De-dollarization
Recently, nations are speaking with each other about how not to use the US dollar as a medium for transactions. Saudi Arabia, the UAE, Malaysia, Brazil, and India have all recently stated that they are open to the idea of trading currencies other than the US dollar. In January 2023, Brazil and Argentina agreed to start discussing the creation of a new unique currency. Both presidents, Lula, and Alberto Fernandes, spoke of actively studying the size of their economies, the role of central banks, and all that would be necessary to reach their common de-dollarization objectives.
Furthermore, in March 2023, French and Chinese energy companies completed the first Liquified Natural Gas (LNG) contract in the Chinese Yuan. In addition, Saudi Arabia is considering selling oil in the Chinese Yuan.
Beside the accumulation of Yuan’s bank reserves, gold is used as a way to store value. Additionally, it appears that foreign central banks are selling their US dollars in favor of a more conventional store of value. As a result, global central banks purchased more gold in 2022 than they have since 1950.
Over the last couple of years, countries (Brazil, India, and Turkey) are looking towards diversifying their mediums of exchange and predominantly buying gold. Likewise, Russia’s invasion of Ukraine has triggered an increase in the price of gold these past few months as Western economies tremble.
Today there is no single currency currently capable of competing with the dollar, but several currencies competing with another. This competition between potential dollar rivals is maintaining the predominance of the dollar. However, with the active political support of the Chinese government, the Yuan could become a currency stored in central bank reserves. The global dominance of the dollar can be reduced without being undermined. Simultaneously, other regional currencies can become more dominant in specific regional spheres of influence.
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