The hegemony of the dollar is in danger

The hegemony of the dollar is in danger
The hegemony of the dollar is in danger

The hegemony of the dollar is in dangerEP

The dollar became the main currency for international trade and reserves throughout the 20th century. With the United States at the head of global trade and the West’s hegemony consolidated after the fall of the Soviet Union, greenbacks came to occupy the undisputed throne of currencies worldwide. However, the current economic crisis and the rise of China and India as commercial powers is favouring the de-dollarisation of the economy.

According to IMF data, over the past two decades the dollar has gone from representing more than 70% of global official reserves to 58% today. This decline has accelerated over the past year due to the growing trend towards de-dollarization as a defense mechanism against the abuse of economic sanctions by the United States. This has translated into the fact that other global actors are promoting the use of their currencies in bilateral trade and exponentially increasing their gold reserves. In this context, the group of emerging countries that form part of the BRICS economic bloc (Brazil, Russia, India, China and South Africa) have not only promoted their own financial institutions with the aim of becoming an alternative to Western ones, but are also working on the creation of a new single currency as a counterpart to the dollar for international transactions.

De-dollarization is the process of reducing the dominance of the US dollar in global trade and financial assets. Recent data shows that other currencies are gaining ground and that the US dollar is no longer the alpha currency it once was. The rise of other economic blocs and rising political tensions have led countries to re-evaluate their dependence on the US dollar in global economies. For some nations, this has led to strategies to promote regional integration and bilateral relations in an attempt to protect themselves from geopolitical risks. In June 2021, Russia announced the removal of the US dollar from its National Wealth Fund, thereby reducing its vulnerability to Western sanctions. JP Morgan recently warned that signs of de-dollarization are already being seen in the global economy. According to the bank, it is the tensions produced by sharp increases in US interest rates and sanctions that have left Russia out of the global banking system that have been the main factors that have driven several countries to challenge the hegemony of the dollar.

China’s strong economic growth has called into question the economic sovereignty of the US and its currency. Since the beginning of this century, more and more countries have chosen the Asian giant as their main trading partner. Moreover, Beijing said in April that the yuan has already become the most used currency for its cross-border transactions, overtaking the dollar for the first time. Cross-border payments in yuan reached a record $549.9 billion in March.

Along these lines, Putin’s government has been working with Beijing to eliminate its dependence on the dollar. Russia has sought alternatives to manage its trade and reserves. The yuan makes Russia dependent on Beijing’s goodwill. Moscow has rapidly stepped up its use of the Chinese currency in two main ways: by increasing the yuan’s share of its reserves and by switching to direct trading of rubles and yuan instead of using the dollar as an intermediary. Late last year, Russia’s Finance Ministry increased the allowed share of yuan reserves in the National Wealth Fund to 60%. Meanwhile, ruble-yuan trade increased eighty-fold between February and October 2022.

If the dollar continues to lose ground in international relations, other currencies will try to take its throne, and China is one of the countries that may try to promote its currency. However, it does not seem likely that China will fully liberalize and open its financial markets for cross-border transactions. The euro is one of the alternatives to displace the dollar. As it is essentially a multinational currency and is linked to several of the world’s strongest economies, it could become the ideal candidate, as it also meets the standards of transparency and regulation, and it should not be forgotten that the euro holds around 20% of the world’s foreign exchange reserves.

No one questions any more that the dollar is losing ground to the yuan or gold on central bank balance sheets. China is selling US Treasury bonds and investing its current account surplus in other assets that are not denominated in dollars and these record sales by the Chinese could be one of the first signs of a major fiscal crisis in the United States. This is not the first time that the spectre of a debt crisis in the United States has appeared. Several economists at major Wall Street firms admitted in May that another economic recession in the United States would increase deficits and debt more than expected. This debt crisis would be triggered by China. The People’s Bank of China is getting rid of American debt. According to official data from the US Treasury, US bonds held by China have fallen by more than 100 billion dollars in just one year. China currently holds just over $767 billion in US debt, the smallest amount since 2009. But that is still more than enough to put an end to an economy like the US, which has hundreds of billions of dollars in annual repayments.

The author is an economist

 
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