2023-07-24 19:00:00
The dollar has been the world’s premier reserve currency since World War II, but a combination of political and economic reasons is slowly beginning to erode its dominance.
According to the International Monetary Fund, nearly 60 percent of international reserves are held in dollar-denominated assets, and the dollar is the currency most used in trade, while Western-led sanctions against Russia related to its invasion of Ukraine make other countries wary of the potential consequences of crossing Washington, according to Al Arabiya.net, quoting Insider.
On the other hand, some countries such as Brazil, Argentina, Bangladesh and India change the structure of their reserves of currencies and reserve assets, such as the Chinese yuan and “Bitcoin” for trade and payments, while the overall geopolitical environment stimulates countries to search for alternative currencies, in light of the long-standing uneasiness regarding the huge dominance of the dollar in global trade and finance, given that talk about de-dollarization has come in waves every few years since the 1970s at least.
Here are other reasons countries around the world are trying to devise plans to move away from a dollar-dominated world:
influence of US monetary policy
The United States is the issuer of the world’s first reserve currency, and the dollar is also the dominant currency in international trade and payment systems. Thus, Washington has significant control over the global economy that is often overestimated, the Wilson Center think tank reported in May.
This position gave the United States what Valéry Giscard d’Estaing, President of France from 1974 to 1981, called an “exorbitant privilege.” One aspect of this concession is that the United States may not experience a crisis if it is unable to pay its debts when the value of the dollar falls sharply, because Washington can simply issue more money.
It also means that countries around the world must closely adjust US economic and monetary policies to avoid a spillover effect on their economies.
Some countries, including India, have stated that they are sick and tired of US monetary policies holding them hostage, going so far as to say that the US was an “irresponsible” issuer of global reserve currencies.
A working group at the Reserve Bank of India is now pushing for the Indian rupee to be used for trade, a stance that is consistent with Indian Prime Minister Narendra Modi’s vision for the currency.
The cost of the dollar to emerging countries
The US currency is strengthening against most currencies around the world, making imports more expensive for emerging countries.
In Argentina, political pressure and a decline in exports contributed to a decrease in US dollar reserves and put pressure on the Argentine peso, which in turn led to an increase in inflation, while the Chinese Minister of Economy said last Wednesday that this prompted Argentina to start paying for Chinese imports using yuan instead of dollars.
“The strength of the dollar will weaken its role as a reserve currency,” economists at Allianz, an international financial services company, wrote in a report dated June 29, noting that “if access to the dollar becomes more expensive, borrowers will look for alternatives.”
Brazil’s President, Luiz Inácio Lula da Silva, has been the most outspoken proponent of creating alternative currencies for trade settlement, going as far as Brazil, Russia, India, China and South Africa to move away from the dollar.
Allianz economists stated that “the structural change in the oil market caused by the shale oil revolution could paradoxically harm the US dollar as a global reserve currency, because oil exporters, who play a decisive role in setting the dollar, will need to reorient themselves towards other countries and their currencies.”
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