April 24, 2024

3 Reasons Nations Want to Break Up With the USD

  • The US dollar has been the world’s reserve currency for decades, but its dominance is waning.
  • Sanctions against Russia have encouraged other countries to consider reserve currencies for trade.
  • US monetary policies, the strong USD, and a structural shift in the global oil trade also help.

It is the dollar in the world reserve currency since the Second World War, but a combination of political and economic reasons are slowly eroding his supremacy.

Almost 60% of international reserves are held in dollar-denominated assets, according to the International Monetary Fund. The dollar is also the currency most used for trade.

Now, Western-led sanctions against Russia related to its invasion of Ukraine are warning other countries of possible consequences of crossing Washington.

Some, such as Brazil, Argentina, Bangladesh, and India, are lining up reserve currencies and assets – such as Chinese yuan and bitcoin – for trade and payments.

Although the macro-geopolitical environment is encouraging countries to seek alternative currencies, there has long been uneasiness about the dominance of the dollar in global trade and finance.

This talk of de-dollarization has come back in waves every few years since at least the 1970s.

Here are three more reasons why countries around the world are trying to put together plans to move away from a world dominated by the dollar.

1. US monetary policy has too much control over the rest of the world

The US is the issuer of the world’s reserve currency, which is also the dominant currency in international trade and payments systems.

Therefore, it has an overwhelming hold on the world economy and is often overvalued, the 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 privilege is that there may not be a crisis in the United States if it is unable to pay its debts when the value of the dollar falls sharply because Washington can issue more money.

It also means that countries around the world must closely implement the economic and monetary policies of the US to avoid repercussions on their economies.

Some countries, including India, have said they are sick and tired of US monetary policies that are holding them hostage – going so far as to say that the US has been an irresponsible issuer of the world’s reserve currencies.

A working group at the Reserve Bank of India is now pushing to use the Indian rupee for trade — a position that is in line with Indian Prime Minister Narendra Modi’s vision for the currency.

2. The strong USD is becoming too expensive for emerging nations

The increasingly strong greenback against most currencies around the world has made imports much more expensive for emerging nations.

In Argentina, political pressure and a decline in exports contributed to the fall in US dollar reserves and put pressure on the Argentine peso, which in turn led to fueled inflation.

This prompted Argentina to start paying for Chinese imports using yuan instead of US dollars, the nation’s economy minister said on Wednesday. Reuters reported.

“A stronger USD could weaken its role as a reserve currency,” economists at Allianz, an international financial services firm, wrote in a statement report 29 June. “If access to USD becomes more expensive, borrowers will look for other options.”

President of Brazil Luiz Inácio Lula da Silva was one of the most vocal in establishing alternative trade-settlement currencies, going so far as to move Brazil, Russia, India, China and South Africa away from the US dollar.

3. Global trade and oil demand are diverging — putting the petrodollar at risk

A major reason why the US dollar became the world’s reserve currency was that the Gulf countries in the Middle East used the greenback to trade oil – because it was already a widely used trading currency by the time they were trading oil.

The formal arrangement was made in 1945 when the country became an oil giant Saudi Arabia and the US reached a historic deal in which Saudi Arabia would sell its oil to America using the greenback. In return, Saudi Arabia would reinvest excess dollar reserves in US funds and companies. The arrangement guarantees US security for Saudi Arabia.

But then the US became energy independent and a net oil exporter with the expansion of the shale oil industry.

“The structural change in the oil market brought about by the shale-oil revolution could paradoxically 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,” Allianz economists reported.

It’s not just oil, either.

The relationship between the United States and Saudi Arabia – a A description has been made so like “frenemies” — is also a testament to a number of issues in recent years, such as when then-President Donald Trump complained that Saudi Arabia was not paying a fair price to the US to protect, and when President Joe Biden snubbed Crown Prince Mohammed bin Salman over the murder of Washington Post journalist Jamal Khashoggi.

Such tensions, in the context of the shale-energy revolution, raise the possibility that Saudi Arabia could one day abandon its US-designated oil pricing, according to Sarah Miller, editor at Energy Information, energy information firm, written in November last year.

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