Dethroning King Dollar: A Thought That Can Irritate The World’s Most Powerful Country!
When everything is said and done, economists agree that de-dollarisation will be a lengthy and unpredictable trip. Experts say the dollar will remain the leading reserve currency for decades.
If the previous twelve years have taught us anything about markets and the economy, anything can happen, no matter how implausible. Until the subprime mortgage crisis, the housing market in the United States, using the dollar, was regarded as the most secure investment in history. It was unimaginable that the European Union would ever come close to dissolving and taking the euro with it — until Greece defaulted. And everyone knew that inflation like that of the late 1970s would never return — until the pandemic gasped global supply chains.
The globe is in turmoil on many fronts, undermining the United States’ unrivalled unipolar superiority and the dollar’s primacy as the globe’s reserve currency. Moreover, because the dollar is a reserve currency, it has unlimited demand, allowing the US and US companies to borrow money internationally.
How dominant is the dollar?
World trade is also mainly conducted in dollars; according to the Bank for International Settlements, dollars accounted for 88% of total global transactions in 2022. This implies that countries worldwide must hold the USD to purchase goods from international marketplaces. As a result, demand for USD rises, and the cycle repeats.
The dollar’s reserve currency status also gives the US enormous economic and political leverage, allowing it to maintain its role as a superpower.
However, Dedollarization is becoming more appealing.
The US’s use of the dollar’s reserve currency status to wage an economic war through sanctions and monetary policy decisions that have resulted in the exportation of inflation to other countries have led to increasing demands for de-dollarisation in several countries around the globe, the majority of which are not allied with the US.
According to economist Peter C Earle in a post for the American Institute for Economic Research, the USD’s destiny as the lingua franca of international business may already be decided by weaponising USD supremacy and allowing increasing requirements to disorient US monetary policy. There is growing worry that Russia’s invasion of Ukraine may start a downward spiral for the US currency. The belief is that the United States has “weaponized” the USD by imposing harsh financial restrictions on Russia, including blocking its central bank from accessing its foreign currency reserves.
Countries that have shown a closed door in the face of the dollar.
China, Russia, and Iran are among the countries that have moved against the dollar; although the latter two have done so in response to sanctions imposed on the United States and its allies, China’s activities are more sophisticated and driven by its aim to dethrone the US as the world’s superpower. For example, China has already begun settling its first liquefied natural gas (LNG) trade in yuan with TotalEnergies of France. In addition, following Russia’s exclusion from the SWIFT payment system, the yuan has surpassed the USD as the most traded currency.
Other nations that have lately joined the bandwagon include India, Saudi Arabia, Brazil, and even Malaysia. India’s attempts have begun in earnest with the implementation of its new foreign trade strategy in April of this year. As a result, 18 nations, including the United Kingdom, Germany, Singapore, and others, have agreed to settle trade in rupees. Also, why couldn’t an organization like the BRICS bank have a currency to fund trade contacts between Brazil and China, and between Brazil and the other BRICS nations, that can challenge the dollar’s hegemony and term its role in the global economy ‘outsized’?
The process of de-dollarization seems to be an extended voyage.
To be sure, discussions on de-dollarization have been going on for decades. The desire for a stable, politically neutral currency has always existed, but it has never materialized, and the USD has remained the world’s reserve currency despite various hitches over its reign.
De-dollarization will continue as long as the political resolve to bind the United States’ fiscal and monetary policies to those continuous with the constitution of sound money remains unconversable. And, whether slowly or quickly, the USD will lose ground overseas.
It is finishing that trip, which might take a long time due to the dollar’s pervasiveness in international trade and the network effects linked with it. While 88% of international transactions were in USD, only 31% were in euros, and only 7% were in yuan.
According to a Deutsche Bank report, the dollar’s standing is under threat on numerous fronts. This involves the use of local currencies as a means of trade between two nations. To date, the most powerful weapon in the inventory of countries seeking to minimise their reliance on the USD.
Private sector flows are another important indicator of declining reliance on dollars; the euro is once again the closest challenge to the USD, accounting for 31% of overall flows by the end of 2022, while the USD held 47%. Over the last 20 years, however, the dollar’s share has fallen by 5 percentage points.
When everything is said and done, economists agree that de-dollarisation will be a lengthy and unpredictable trip. According to Deutsche Bank economist Alan Ruskin, the USD is expected to remain the leading reserve currency for decades to come.
Conclusion.
Whether any existing currency dethrones the USD or a new reserve currency is created – a process known as Bretton Woods– the USD will remain King for the time being. This was the scene from the past as the clock is ticking now. Who knows when the position of being the most dominant currency leaves the fate of the dollar and finds a better currency?
