There are growing calls to reduce dependence on the US dollar in trade and reserves, threatening the greenback's leading position...
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| There are growing calls to reduce dependence on the US dollar in trade and reserves, threatening the greenback's leading position... |
Recently, with the strong rise of economies such as China, India, Russia, Brazil and profound geopolitical changes, efforts to reduce dependence on the US dollar have increased.
Efforts to reduce dependence
According to The Hindu (India) on May 4, India and Malaysia agreed to use Rupees to pay for trade transactions between the two countries. Previously, Brazil and China agreed to increase payments in local currencies by February 2023. Recently, Saudi Arabia and the UAE announced that they would accept alternative currencies other than the USD in oil exports, while Iraq announced a ban on personal or business transactions in USD in the country...
Currently, Russia and China are the two leading countries in the effort to de-dollarize. During their visit to Russia last March, Chinese President Xi Jinping and Russian President Vladimir Putin issued a statement agreeing to strengthen bilateral economic cooperation, notably promoting the use of the Chinese Yuan (RMB) in transactions between the two countries. President Putin affirmed his support for “the use of RMB in payments between Russia and countries in Asia, Africa and Latin America.”
Previously, at the 14th Summit of the Group of the World's Leading Emerging Economies (BRICS) held in June 2022, Russian President Vladimir Putin proposed studying the possibility of establishing an international reserve currency based on the national currencies of the BRICS countries. President Putin's idea was supported by members of the group, especially China and Brazil.
According to Bloomberg, in February and March, the yuan officially surpassed the dollar to become the main currency traded in Russia. Previously, the proportion of payments in rubles and yuan increased significantly, reaching 47% in March 2023 in transactions between the two countries. The yuan is also promoted in financial transactions between ASEAN countries, the region that is currently China's largest trading partner.
However, the current global usage of the RMB is still low. This currency accounts for only 2.19% of total global payments; 3.5% of foreign exchange transactions; 2.69% of reserves in central banks, and 12.28% of the Special Drawing Rights (SDR) currency basket of the International Monetary Fund (IMF).
From USD to "Petrodollars"
Relying on its powerful economic and military power and its ownership of 80% of the world's gold reserves, after World War II, the US established the Bretton Woods system, tying the value of the USD to the price of gold. From here, the USD began to replace the British pound and became the leading currency.
The US then undertook the reconstruction of Europe with the four-year Marshall Plan, providing the EU with over $13 billion in aid, 90% of which was in the form of “gifts” and only 10% in the form of loans, which allowed the US dollar to take root in Europe and then spread globally.
However, by the late 1960s, due to excessive military spending, the US government was forced to print and issue large quantities of USD, causing it to begin to lose value. To prevent damage, countries using USD sold off their USD reserves to buy gold, causing the USD to lose value miserably. The US lost a large amount of gold reserves, from more than 20 billion ounces when Bretton Woods was established in 1944 to 250 million ounces in 1971, when Bretton Woods ended.
Under economic pressure, the US government had to introduce a new economic policy, ending the ability of foreign governments or central banks to use the US dollar to exchange for US gold. The US Federal Reserve (Fed) announced the separation of the US dollar from the gold standard, causing the Bretton Woods system to officially collapse. However, the collapse of Bretton Woods did not mean that the US gave up the world's leading position of the US dollar.
When the fourth Middle East war broke out in 1973 between Egypt, Syria and Israel, the opportunity for the US to regain the hegemony of the US dollar came. Under the influence of the US, in 1973, Saudi Arabia was the first country to sign an agreement with the US, agreeing to use the US dollar to pay for oil exports. Two years later, all OPEC member countries agreed to use the US dollar in transactions. Since then, the US dollar has separated from gold and formed a new combination with oil, based on the value of oil transactions, becoming "Petrodollars".
To buy oil, countries are forced to prepare large reserves of USD, which causes the demand for this currency to continuously increase. In addition, oil exporting countries use Petrodollars to buy US bonds and related financial products, causing a large amount of USD to return to the US. The US government no longer has to worry about the USD losing value as quickly as before.
In fact, in addition to Petrodollars and US public debt supporting the USD, the two institutions retained after the collapse of the Bretton Woods system, the IMF and the World Bank (WB), also helped the USD regain its dominant position in the international market.
In the SDR currency basket later created by the IMF, the USD accounts for up to 70%. The US is also the largest shareholder of the WB and has veto power on important issues of these two organizations. In addition, loans through the IMF and WB mechanisms all use USD as the basis for valuation. This makes the USD continue to be widely supported by borrowing countries.
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| BRICS countries are aiming to launch a new currency to compete with the US dollar. (Source: Chinadaily.com.cn) |
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Although the "Petrodollar" is closely tied to the "oil standard", the source of this resource is located in another country. To monitor the use of USD in circulation, in 1974, three years after the end of Bretton Woods, the US established the Society for Worldwide Interbank Financial Telecommunication (SWIFT). Although SWIFT is a neutral non-profit organization, transactions through this system basically use USD as a means of payment. While other currencies are traded through SWIFT in small quantities, in reality the flow of money through this system is still controlled and dominated by the US.
The fact that the US dollar is widely traded and is mainly held as a reserve in many economies also causes problems for many countries. When the US dollar increases in value, it means that other currencies will lose value, leading to inflation. Conversely, when the US dollar depreciates, it causes other currencies to increase in value, which is beneficial for management in other economies. Because strategic goods are priced in the US dollar, when this currency depreciates, prices will increase, leading to widespread imported inflation.
The Fed controls the printing of money, but the US Treasury uses the US dollar to make loans, forcing central banks of borrowing countries to buy US bonds. In the event of a devaluation of the US dollar, countries borrowing through US government bonds have no choice but to accept a decrease in their reserve assets.
The US could use SWIFT to prevent sanctioned countries from using the US dollar in international payments, or even to exclude “unfriendly countries” from SWIFT. In addition to the demands for policy reforms, the “bitter pill” for some developing countries through IMF loans and regular warnings to these countries.
For the above reasons, the need to find a non-USD payment mechanism is increasing. However, with the economic strength and geopolitical role of the United States, the influence and position of the USD is still very difficult to replace. Currently, the United States is the world's largest oil producer and exporter, the world's leader in gold reserves with more than 8,000 tons, and has strong technological innovation capacity. The USD's market dominance function is still very strong. Of the 81 types of raw material prices announced by the United Nations Conference on Trade and Development (UNCTAD), only five are not priced in USD.
In terms of circulation, according to SWIFT statistics, in current international payments, the market share of the USD is 41.1%; in cross-border trade finance, the proportion of the USD is up to 84.32%; in global foreign exchange transactions, the USD accounts for 88%; in financial transactions, 47% of international debt is denominated in USD and up to 58% of international reserves are assets denominated in USD. In terms of the proportion of the above indicators, the USD is at the top.
In such a context, although many economies are making efforts to “de-dollarize”, as long as developed economies continue to use the US dollar in bilateral investment and trade, this effort by developing and emerging economies will still face limitations. Certainly, for a long time to come, the US dollar will remain the leading currency in world trade and reserves.
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