Finally, Elon Musk, one of the richest people in the world, also expressed his displeasure. The Tesla and Twitter owner said in a tweet after an economist opined that the use of the U.S. currency, the dollar, is declining. Peter St Onge of the Heritage Foundation commented on the global clamor for ‘de-dollarisation’ or ‘dollarisation’ of the financial system.
“De-dollarization is now real and it’s happening very strongly,” says Peter St. Onge, who also gives an account. In 2001, the share of the dollar in the reserve currency system of the world was 73 percent, in 2020 it stood at 55 percent. And after the imposition of sanctions on Russia, this rate further decreased to 47 percent. It is said that de-dollarization is now happening 10 times faster than it was two decades ago.
These debates about the dollar have intensified due to the statement of the leading monetary expert Steven Jane. In April, he published a research note saying the dollar had seen a “spectacular decline” in 2022 as a reserve currency. And for this, he blamed the imposition of sanctions. Steven Zane is the chief executive of Urizon SL, a macroeconomic analysis firm. He is the father of the ‘Dollar Smile’ theory. The theory goes that if the US economy is too strong or too weak, the value of the dollar rises. He was the first to say that taking into account the ups and downs of the exchange rate, the dollar’s share in global reserves fell to 47 percent last year. According to the International Monetary Fund (IMF), however, more than 58 percent of the world’s reserves are still held in US dollars. However, no one disagrees that the share of the dollar is decreasing. Even the IMF’s account of reserves in dollars is the lowest since 1999.
Dollar weapon:
Accusations of using the dollar as a weapon are not new, however. However, allegations of the use of “dollar weapons” have intensified since the start of the Russia-Ukraine war. To punish Vladimir Putin, the United States and the Western world under its leadership imposed sanctions against Russia, expelling it from SWIFT, the most reliable system for financial transactions. Russian assets abroad were also seized.
Before the war, Russia’s reserves amounted to 62 billion dollars. Half of it is either seized or confiscated. And the wealth of the super-rich, known as oligarchs, has been outright confiscated. Many countries have seen the danger here. According to them, the Western world has tried to capture Russia by using a dollar-based financial system.
As a result, if the interests of the West are disturbed, similar measures can be taken against them. Perhaps this idea is most prevalent in China. The fear of China’s conflict with Taiwan is now stronger than ever. As a result, Beijing cannot trust that the West will not use one of its most powerful weapons against China.
The most used currency in the world is dollar. After World War II it emerged as the reserve and main currency of world trade. The huge influence of the dollar has helped some countries to unite against it. An article published in the Global Times, the mouthpiece of the Chinese Communist Party, said more and more countries are seeking rapid de-dollarization due to rising interest rates in the United States and the resulting dollar crisis. That said, it is now proven that breaking the dominance of the dollar is possible.
Fed rate hikes
After the start of the Russia-Ukraine war, the Federal Reserve chose to reduce the money supply to reduce inflation. Interest rates rose to a 16-year high. It helped the United States, but it posed a grave danger to other countries. The value of the dollar has risen, making their debt repayments, and imports more expensive. Countries like Bangladesh have fallen into a dollar crisis. Food and fuel inflation has increased in all countries. Dollars are returning to the US as an investment in US assets is profitable.
In the geopolitical changes that are happening in the world, China is now one of the controlling powers. Beijing also wants a bigger role in international trade. Wants a new system. As China itself tries to use its currency, the yuan, internationally, some other emerging powers are seeking an alternative to the dollar. Notable among them are the BRICS countries.
The rise of the BRICS
BRICS members Brazil, Russia, India, China, and South Africa account for a quarter of global GDP. 42 percent of the world’s people live in these five countries. That is, they themselves have a large number of consumers. At least 19 countries have already expressed interest in joining the alliance, including countries such as Saudi Arabia and Iran. Several other countries including Bangladesh have become members of the New Development Bank established by BRICS.
Brazil, the largest country in Latin America, is not only willing to trade and invest bilaterally in yuan; Rather, they also called for more transactions in BRICS to be done in local currencies. Brazilian President Luiz Inacio Lula da Silva raised the question, ‘Why do all countries use the US dollar for transactions? Why not in yuan or other international currencies? Recently, several other countries have said that they want to trade in yuan. One of them is Argentina. The Latin American country, which is in the midst of a dollar crisis, has announced that it will use the yuan instead of the dollar in transactions with China. Indonesia has taken a similar decision. On the other hand, Beijing is working with Middle Eastern countries to use the yuan to sell oil. The Chinese President Xi Jinping visited Saudi Arabia last December. At that time, he said, a new system should emerge in the field of energy cooperation.
Internationalization of the Yuan
The Kremlin’s efforts to punish the West have helped Yuan immensely. One of the reasons China wants to internationalize its currency is as a way to protect itself against possible sanctions. They want to reduce the dependence on the dollar for the import of daily necessities. The share of the euro as a reserve currency is still around 20 percent. On the other hand, the share of yuan is only 2.7 percent. But the yuan has had recent successes in global trade.
Last year, Russia paid 23 percent of its imports in yuan, up from 4 percent previously. China itself has increased its use of the yuan in international transactions. Last March, China used the yuan more than the dollar for the first time in cross-border transactions—48.4 percent of all transactions. During this time they used 46.7 percent of cases.
China’s ambitions are growing. The world’s second-largest economy is now the largest trading partner of many countries. According to the IMF, the number of countries that trade most with mainland China in terms of imports and exports is 61. 30 of the United States. In March, China imported 65,000 tons of LNG from France’s TotalEnergy. And China is the first to use its own currency to import LNG by paying the price in yuan.
However, the use of yuan in international trade is still very low, but its use is gradually increasing. The use of the yuan in global trade rose 4.5 percent in March, SWIFT data showed. In this case, the share of dollars was 83.71 percent. If China does all its transactions in yuan, the yuan’s share of world trade will increase to only 12 percent.
A three-pole monetary system
Top experts pretty much agree that, even if de-dollarization happens, the potential currencies that could displace the dollar have some weaknesses. Attempts to remove the dollar from the global trading system will not overcome any time soon, believes Steven Zane. According to him, the yuan and euro will share the dominance of the dollar and a ‘triple pole’ system will emerge as the reserve currency.