Global Courant 2023-04-18 11:23:05
Is the dollar dying? In the aftermath of the war between Russia and Ukraine and the massive growth of money supply and the Assets of the US Federal Reserve in recent years there has been a slew of stories and speeches extolling the virtue of de-dollarization.
The most recent came last weekwhen Brazilian President Luiz Inácio Lula da Silva called for the introduction of a BRICS (Brazil, Russia, India, China and South Africa) currency.
“Every night I wonder why all countries should base their trade on the dollar,” he said.
A few days earlier, Malaysian Prime Minister Anwar Ibrahim claimed that there is no reason for his country to do so continue depending on the dollar.
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And figures released on April 3 showed that in February, The Chinese yuan outperformed the dollar as the most traded currency in Russia.
These events have contributed to the feeling that the US dollar is in decline. With the rise of China and the continued polarization of geopolitics, there is a clear sense that the yuan may threaten dollar dominance.
Countries formerly tied to the dollar could now strike to trade in other currencies – for commercial reasons, or even political reasons if they disagree with Washington.
The China National Offshore Oil Corporation and France’s TotalEnergies closed the first yuan-settled energy deal in March by selling 65,000 tons of liquefied natural gas from the Emirates. Even Saudi Arabia has hinted in the past year that this could be the case start settling oil trading in yuan instead of the dollar.
Yuan held back
But while the use of the yuan is likely to continue to rise for certain forms of trade and finance, the internationalization of the yuan is still hampered by capital controls, a lack of capital account convertibility and financial sector liberalization. So there is still no real challenger to the dollar for the foreseeable future.
Some statistics can provide context on this point. The yuan’s share of trade finance has more than doubled since Russia invaded Ukraine. according to the Financieele Dagblad. The currency’s share of trade finance on the SWIFT (Society for Worldwide Interbank Financial Telecommunication) banking system grew from less than 2% in February 2022 to 4.5% in February 2023, a remarkable rate of growth.
But these gains clearly tie in with the period when Russia itself was cut off from SWIFT. Punishing Western sanctions, Moscow has turned to China for a much larger share of its imports. So, unable to finance in rubles, Russia has turned to the yuan.
Not only that, according to SWIFT, China’s share of the financing of world trade remains small. For context, the share of the Euro is 6% and the share of the US Dollar is over 84%. Given that China is the world’s largest commodity trading nation, it is remarkable that the yuan takes on such a small share of trade finance, indicative of the difficulties of internationalizing the currency and the dollar’s continued status as a reserve currency .
Other than the yuan, there are no other real challengers. The closest competitor would be the euro, but this is the currency of a disparate group of 20 states with different fiscal policies, debt and stock markets that experienced a significant sovereign debt crisis just over a decade ago. The chances of the euro being seen as a viable alternative in the near future are slim.
And if that’s true for the euro, imagine how much more it would be for a BRICS currency – an imaginative idea that would try to unite widely divergent economies in a monetary union with little fiscal or political unity.
What about non-fiat alternatives? Crypto devotees will wax poetic about the benefits of cryptocurrencies like Bitcoin, and why they should be viewed as a better store of value than the dollar. But Bitcoin, which is hardly used as a medium of exchange, saw its value in dollars collapse by 75% between the end of 2021 and the end of 2022, before recovering in April 2023.
This hardy appears to be a widely traded, trusted or valued currency that financiers, companies and governments would use in their transactions.
All this means that the dominance of the US dollar is here to stay. Removing the dollar as a reserve currency would require the emergence of a freely tradable and convertible alternative that is widely and easily used for trading, reserves and finance. Eventually that could be the yuan, but certainly not now.
The continued devaluation of the dollar and the growth of Chinese trade are likely to cause the dollar to lose some of its luster. But the idea that the petrodollar is dead — given that major oil-producing states like Saudi Arabia and the United Arab Emirates still peg their currencies to the dollar — is far-fetched.
Despite the grumbling, states are likely to use the dollar as a global reserve currency for years to come.
This article is provided by Syndication Bureauon which the copyright is based.
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