The US dollar’s dominance in world trade is being challenged by a number of important external factors. Getty Images
The US dollar was the world‘s reserve currency for decades, but its dominance is waning.
The sanctions against Russia have prompted other countries to consider substitute currencies for trade.
US monetary policy, the strong US dollar and structural changes in global oil trading are also contributing.
The US dollar has been the world reserve currency since World War II, but a combination of political and economic reasons is slowly eroding its supremacy.
According to the International Monetary Fund (IMF), nearly 60 percent of international reserves are held in dollar-denominated assets. The dollar is also the most commonly used trading currency.
The sanctions imposed by the West on Russia after the attack on Ukraine make other states shy away from the possible consequences of a conflict with Washington.
Some countries like Brazil, Argentina, Bangladesh and India are using surrogate currencies and assets like the Chinese yuan and bitcoin for commerce and payments.
While the macro-geopolitical environment is prompting countries to seek alternative currencies, there has long been unease about the US currency’s outsized dominance in global trade and finance.
Abolition of the dollar has been brought up again every few years since at least the 1970s.
Here are three more reasons countries around the world are trying to plot a possible move away from a dollar-dominated world.
1. US monetary policy exerts too much influence on the rest of the world
The US is the issuer of the world reserve currency, which is also the dominant currency in international trade and payment systems. As a result, it has an outsized impact on the global economy and is often overvalued, the think tank of the Wilson Center Im Mai.
This position has given the US what Valéry Giscard d’Estaing, French President from 1974 to 1981, called “exorbitant privilege”. One aspect of this privilege is that the United States does not face a crisis if it is unable to pay its debts when the value of the dollar falls sharply. Because Washington can simply spend more money.
But it also means that countries around the world must follow US economic and monetary policies closely to avoid spilling over into their economies.
Some countries, including India, have said they are tired of being held hostage by US monetary policy – going so far as to say that the US has been an irresponsible issuer of world reserve currencies.
A working group at India’s central bank is now pushing to use the Indian rupee for trade – a stance in line with Indian Prime Minister Narendra Modi’s vision for the currency.
2. The strong USD is becoming too expensive for emerging markets
The dollar, which is strengthening against most of the world‘s currencies, is making imports significantly more expensive for emerging countries.
In Argentina, political pressures and a slowdown in exports contributed to a decline in US dollar reserves and distressed the Argentine peso, which in turn fueled inflation.
This has prompted Argentina to pay for Chinese imports in yuan instead of US dollars, Argentina’s economy minister said last Wednesday Reuters reported.
“A stronger USD would weaken its role as a reserve currency,” the Allianz economists wrote in one June 29 report. “As access to the USD becomes more expensive, borrowers will look for alternatives.”
Brazilian President Lula Silva has been one of the most vocal advocates of introducing alternative trading currencies, even going so far as to urge Brazil, Russia, India, China and South Africa to ditch the US dollar.
3. World trade and oil demand are diversifying – the petrodollar is at risk
A major reason the US dollar became the world reserve currency is that the Gulf countries in the Middle East used the dollar for oil trading – because by the time they started oil trading it was already a widely used trading currency.
The agreement was formalized in 1945 when oil giant Saudi Arabia and the US struck a historic deal whereby Saudi Arabia would sell its oil to America using only the greenback. In return, Saudi Arabia should reinvest excess dollar reserves in US Treasuries and companies. This agreement guaranteed Saudi Arabia US security.
But then, with the rise of the shale oil industry, the US became independent on energy issues and a net exporter of oil.
“Paradoxically, the structural change in the oil market brought about by the shale oil revolution may harm the role of the USD as a global reserve currency, since oil exporters, who play a crucial role in the status of the USD, would have to reorient themselves to other countries and their currencies,” say the Allianz economists.
It’s not just about oil either.
The relationship between the US and Saudi Arabia – which has been described as “frenemies” – friend and foe at the same time – has also been tense on several issues in recent years. The then US President Donald Trump complained that Saudi Arabia was not paying the US a fair price for its defense. Current President Joe Biden snubbed Crown Prince Mohammed bin Salman over the assassination of Washington Post journalist Jamal Khashoggi.
Such tensions amid the shale-energy revolution raise the possibility that Saudi Arabia might one day abandon its US-aligned oil pricing policy, wrote Sarah Miller, an editor at Energy Intelligence, an energy information firm, in November last year.
External content not available
Your privacy settings prevent the loading and display of all external content (e.g. graphics or tables) and social networks (e.g. Youtube, Twitter, Facebook, Instagram etc.). To view, please activate the settings for social networks and external content in the privacy settings.
Change privacy settings