Alwaght – For nearly 70 years, the US dollar has been the dominant currency globally. The central banks across the world have a large part of their reserves in the dollar and the companies use it for their international exchanges. The US Department of Treasury bonds make the biggest bonds market in the world. The American economy deeply enjoys this dominance. But resistance to the dollar hegemony is in the making.
Last week, the Russian President Vladimir Putin at the Eastern Economic Forum, held in Russia on September 13, pointed to a growing global tendency to ditch dollar from trade, raising a serious need for the countries to do so. He referred to the accumulated US debts which he said are now over $20 trillion, adding that the countries have all rights to do business with their national currencies. Putin said this would “increase the stability of banks’ serving export and import operations while there are ongoing risks on global markets”, adding that Russia is moving in this direction.
The remarks by the Russian leader beside calls from some countries’ leaders over the past few months to end the rule of the US dollar over the global financial system raise some questions about if the countries can ditch the American currency from their trade.
The limitations ahead of using national currencies
The main hurdle is that the US dollar is used as key reserve money by the countries’ central banks. After the WWII, the US, under the Bretton Woods system of monetary management, seized the global financial leadership. However, in the 1970s, as a result of an economic crisis, the Americans introduced changes to the system in a bid to reduce their commitments. Despite that, the dollar has remained a currency for global trade and reserve backup. This means that the dollar place and power are too strong to be removed all of a sudden or replaced by the nations’ national currencies easily.
Moreover, the bilateral monetary treaties have their own troubles which come in two parts: First part comes before signing the deal. Negotiations, agreement, and building trust between the two sides’ businesspeople are the key issues. The second part comes after signing an accord and opening bilateral accounts. In some cases, the businesspeople show no interest in compliance with the agreement. Alexander Gabuev, the chief of Asia-Pacific Program’s Moscow Center, has recently said that it is not yet clear how many companies have used the Chinese-Russian national currency swap mechanism, adding that using the mechanism in the trade pays is costly and risky. He noted that the main issue keeping the traders from using the swap system can be related to the Russian ruble’s instability.
Lack of a trade balance between the two countries can be another obstacle. If the trade volume is heavier to one side, namely one country’s exports are much bigger than the other side, at the end of the road the central bank of the weaker side has to pay off a considerable part of the debts in the form of assets.
Potentials for dumping the US dollar
A global interest in getting rid of the US currency is fast emerging, mainly because the US uses its currency influence to press states that are non-compliant to its policies. Now the US President Donald Trump is waging a trade war against the big economies, including US allies. The pressure from Trump is triggering a consensus among other powers that to deter Washington pressures, a large part of which are put through the dollar dominance, they need to seek a pathway. The consensus unites a range of sides, some of them even with inconsistent interests. China, Russia, the European Union, Iran, and Turkey are the key parties growing antipathetic to the dollar power.
The financial crises also drive the countries to seek use of national currencies in their trade. For example, after the 1997 economic crisis in Southeast Asia, the regional states gathered several times to discuss ways to avoid further similar troubles. The result was a currency swap agreement reached in 2000 between the finance ministers of the ASEAN member states. The treaty stood base to huge developments in the Southeast Asia monetary field. The treaty, dubbed Chiang Mai Initiative, asked for developing bilateral currency swap solutions in the members’ trade in a bid to minimize the power of influence of global currencies, like dollar and euro, on the member states’ economies. The world saw a similar tendency after the 2008 economic recession. Between 2008 and 2015, the number of agreements to ditch dollar from the trade developed fast, reaching 54 between various countries. China is leading the anti-dollar campaign by signing 32 accords with various countries, including South Korea, Canada, Russia, and Brazil. In the second and third places come Japan and South Korea, each consecutively with 9 and 6 agreements. Some European countries such as Britain and Switzerland together signed 11 national currency swap deals.
Use of regional “reserve currency” is also helpful for the effort. The EU’s euro is an example. Regional countries in West Asia, South America, and East Asia can agree on a united regional currency for inter-bloc trade pays. The economists say this measure can help strengthen the non-dollar-based trade and so there will be no dominant currency.
Gradual dumping, however, remains the key policy. Now, the Chinese and Russian economists are preparing a list of goods that can be dealt with the ruble and yuan. Oil is top on the list. Once the dollar is removed from the oil trade, which reaches $14 trillion annually in the world, it can heavily bring the US dollar down.
What is clear is that the dollar power will not continue for a long time. Barry Eichengreen, the co-author of How the Global Currencies Work: Past, Present, and Future, published in 2017, suggests that the reserve currencies can be equal to the dollar as some were in the past. He explored a period from 1910 to 1970, finding that currencies like the British pound, French franc, and German mark, were once strong and now new currencies can fill the same place. He predicted that the US dollar will cease to be a top international currency “soon” and not in a long run. The book seeks to show that the world has a short way to go to return to the time when the global currencies had equal value.