May 19, 2023
BEIJING – “The dollar is our currency, but it’s your problem,” said former US Treasury Secretary John Connally.
Today, many countries are moving faster to shake off this problem.
Malaysian Prime Minister Anwar Ibrahim recently proposed an Asian Monetary Fund to reduce reliance on the US dollar.
ASEAN finance ministers and central bank governors met to discuss using local currencies.
Saudi Arabia announced openness to oil trade settlement in non-US dollar for the first time in 48 years.
IMF figures show that by the end of last year, the dollar’s share of global foreign exchange reserves had dropped to its lowest level since 1995.
A problem for all
After World War II, the dollar was crowned the global reserve currency and pegged to gold under the Bretton Woods system. When the world realized there was simply not enough gold to back the dollar, a run on the greenbacks happened. On August 15, 1971, President Nixon delinked the dollar from gold.
Now, what backs the dollar is only people’s trust. This trust enables the US to keep obtaining 100 dollars worth of goods by printing a paper note costing 17 cents.
But trust is all too fragile given what the US has induced to the world with its currency dominance.
For one thing, self-serving US monetary policy has wreaked havoc on the financial well-being of many countries.
When the US employs an expansionary monetary policy, capital flows to the world and drives up asset prices to the benefit of the US. When US monetary policy contracts, capital flows back to the US, leaving other countries with depreciated currencies and rising debt service costs.
The latest interest hikes by the Federal Reserve have already led to imported inflation in many parts of the world and threatened to sink some countries in even more debt. The IMF’s annual report last year indicated that about 60 percent of low-income developing countries are already at high risk of or in debt distress.
Trust is further eroded by the US wielding its currency as a weapon for geopolitical purposes.
The Ukraine crisis is a case in point, with the US freezing Russia’s foreign reserves and kicking it out of SWIFT.
While Afghans struggle to put food on the table, the US has frozen billions of dollars in Afghan central bank reserves.
Such long-arm jurisdiction has triggered panic in many countries. French President Macron warned against what he called the “extraterritoriality” of the US dollar, which can force European companies to forgo business with third countries or risk sanctions violations.
A way out
The benefits of de-dollarization are evident: avoid undue financial risks, increase returns, protect overseas assets, and most importantly, enhance economic security.
An alternative doesn’t necessarily mean a second US dollar. A single global reserve currency comes with inherent limitations and risks, as the Triffin dilemma articulates.
Currency diversification seems more in line with the prevailing trend of a multipolar world. The rise of emerging markets as an important pole in the world economy creates possibilities for such a scenario.
IMF figures show that the decline in the dollar’s share of global reserves has been matched by a rise in nontraditional reserve currencies such as the RMB, the Australian dollar and the Swiss Franc. Their share in global reserves rose 10 percent in the past two decades.
A quarter of the shift away from the US dollar has been into the RMB, studies reveal. This can be read in the context of a string of recent developments.
In March, the RMB overtook the US dollar for the first time as the most used currency in cross-border payment.
Countries including Russia, Brazil and Argentina are increasingly exploring the use of RMB in trade settlement.
French and Chinese energy companies signed a first-ever deal on LNG trade in RMB.
Whatever the future global currency landscape holds, one thing is for sure: You reap what you sow. When the trust that stops the dollar coaster’s wheels crumbles, no one can stop its roll downhill.