Putin’s war triggers a backlash against the US dollar around the world

(Bloomberg) — Around the world, a backlash is brewing against the hegemony of the US dollar.

Bloomberg’s Most Read

Brazil and China recently reached an agreement to settle trade in their local currencies, seeking to bypass the greenback in the process. India and Malaysia signed an agreement in April to increase the use of the rupee in cross-border business. Even the eternal ally of the United States, France, begins to conclude transactions in yuan.

Currency pundits are wary of sounding like the Cassandras who have embarrassingly predicted the impending demise of the dollar many times over the past century. And yet, watching this sudden flurry of deals to sidestep the dollar, they detect the kind of meaningful, even small and gradual, action that has typically been lacking in the past.

For many world leaders, their rationales for taking these actions are strikingly similar. The greenback, they say, is being weaponized, used to advance US foreign policy priorities – and punish those who oppose them.

Nowhere was this more evident than in Russia, where the United States inflicted unprecedented financial pain on Vladimir Putin’s regime in response to the invasion of Ukraine. The Biden administration has imposed sanctions, frozen hundreds of billions of dollars of Moscow’s foreign exchange reserves and, in concert with Western allies, virtually forced the country out of the global banking system. For much of the world, it was a stark reminder of their own dollar addiction, regardless of what they think of the war.

And that’s the dilemma facing officials in Washington: by relying increasingly on the greenback to fight their geopolitical battles, they not only risk undermining the dollar’s preeminent place in world markets, but they could ultimately undermine their ability to exert influence on the world stage. To ensure long-term effectiveness, it’s often best to leave sanctions as a threat and not actually enforce them, according to Daniel McDowell, author of Bucking the Buck: US Financial Sanctions and the International Backlash Against the Dollar.

“Now a rational actor who knows they could potentially find themselves in this situation in the future is going to prepare for this scenario, and that makes your coercive threats, your deterrent threats, less effective,” said McDowell, the director. undergraduate studies. in the Department of Political Science at Syracuse University. “Maybe the change is marginal now, but even if it ultimately results in something that doesn’t dethrone the dollar,” it still matters how it “can reduce America’s economic power.”

Undoubtedly, part of the abandonment of the dollar is orchestrated by China. President Xi Jinping is seeking to give the yuan a greater role in the global financial system, and his government has made expanding the currency’s use overseas a priority.

Read more: China takes on Yuan Global to fend off the increasingly armed dollar

Yet much of the push is happening without Beijing’s involvement.

India – hardly a strategic ally of China – and Malaysia announced in April a new mechanism to conduct bilateral trade in rupees. It’s part of a broader effort by the Narendra Modi administration — which has not signed on to the US-led sanctions campaign against Russia — to circumvent the dollar for at least some international transactions.

A month later, the Association of Southeast Asian Nations agreed to boost the use of members’ currencies for regional trade and investment.

And South Korea and Indonesia signed an agreement just weeks ago to promote direct exchanges of won and rupiah.

Brazilian President Luiz Inacio Lula da Silva denounced the dominance of the dollar during his visit to Shanghai in April. Standing on a podium surrounded by the flags of Brazil, Russia, India, China and South Africa, the so-called BRICS nations, he called on the world’s largest developing economies to find an alternative to replace the greenback in foreign trade, asking “Who decided that the dollar was the (trade) currency after the end of gold parity?”

He was back to the early 1970s, when the post-war agreement – ​​known as Bretton Woods – that had made the dollar the center of global finance was collapsing. The collapse of the agreement did little to blunt the preeminent position of the dollar. To this day, it serves as the world’s dominant reserve currency, which has boosted demand for US bonds and allowed the country to run huge trade and fiscal deficits.

The centrality of money in the global payment system also allows America to exert a unique influence on the economic destiny of other nations.

According to the most recent data from the Bank for International Settlements, about 88% of all global foreign exchange transactions, even those not involving the United States or American companies, are in dollars. Because the banks that handle cross-border dollar flows have accounts at the Federal Reserve, they are exposed to US sanctions.

While the financial sanctions campaign against Russia is the most recent and high-profile example, Democratic and Republican administrations have used sanctions against countries like Libya, Syria, Iran and Venezuela in recent years. .

The Biden administration recorded an average of 1,151 new designations per year on the Office of Foreign Assets Control’s Specially Designated Nationals list, according to a recent report by the Center for Economic and Policy Research. That’s up from an average of 975 under the Trump administration and 544 during President Obama’s first four-year term.

Read more: America unleashes its economic arsenal against China and Russia

“Countries have chafed for decades under the dominance of the US dollar,” said Jonathan Wood, director of global issues at consultancy Control Risks. “The more aggressive and extensive use of US sanctions in recent years reinforces this unease – and coincides with demands from major emerging markets for a new distribution of global power.”

A Treasury representative referred Bloomberg to Secretary Janet Yellen’s comments during a mid-April interview with CNN, in which she acknowledged that “there is a risk when we use financial sanctions tied to the role of the dollar that over time it could undermine dollar hegemony.

But she noted that the greenback “is used as a global currency for reasons that are not easy for other countries to find an alternative with the same properties.”

Market watchers agree. Even as more countries seek to reduce their reliance on the dollar, few expect its preeminent position in global trade and finance to be threatened anytime soon.

On the one hand, there is no indication that another currency can offer the same level of stability, liquidity and security, they say. Moreover, the vast majority of advanced economy allies of the United States, which account for more than 50% of global gross domestic product, have shown little urgency to turn away from the greenback.

In fact, the dollar has rallied against most of its major peers since the United States tightened its sanctions against Russia last year, a sign that any decline in its global status is likely to be a long and difficult process. slow.

“I don’t see any asset replacing the dollar as the dominant currency, not for the next generation,” said George Boubouras, a three-decade veteran of the markets and head of research at K2 Asset Management in Melbourne. “Nothing comes close to the power of the American economy. China has its problems with aging demographics and the euro is struggling to really gain traction. The dollar will not be dethroned in the foreseeable future.

BRICS backlash

Yet the drumbeat of dedollarization continues unabated in the developing world.

Pakistan is seeking to pay for Russian crude imports in yuan, the country’s energy minister said last month, while earlier this year the United Arab Emirates said it was in preliminary talks with the India on ways to boost non-oil trade in rupees.

Earlier this week, foreign ministers from the BRICS group of nations discussed how the bloc can gain greater global influence, including the possibility of creating a common currency.

“There is no doubt that dedollarization is accelerating and will continue for years to come,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “The United States made a calculated decision to use the dollar to inflict suffering, and there are likely to be long-term consequences.”

–With assistance from Monique Vanek, Mbongeni Mguni, Paul Dobson, Paul Richardson, Daniel Flatley and Christopher Condon.

Bloomberg Businessweek’s Most Read

©2023 Bloomberg LP

Leave a Comment