Twilight of the Dollar

The fall of the dollar in foreign exchange markets

The dollar is clearly losing its prestige.

This is due not only to excessive US spending, resulting in the national debt significantly exceeding the annual GDP, or because the Federal Reserve Bank's anti-inflation tactic of aggressively raising interest rates has made dollar loans extremely expensive, but primarily because of the aggressive sanctions policy against Russia, Iran, China, and other countries.

The latter, in particular, has demonstrated to many countries just how much the US uses the dollar's status as a reserve currency as a political weapon, which can ultimately take its toll on every country. The fact that many important goods and raw materials are sold in dollars encourages many countries to hold dollar reserves or stabilize their exchange rates against the dollar, which is one of the reasons why Washington's spending behavior has had no consequences for the US so far. Valerie Giscard d'Estaing, President of France from 1974 to 1981, once spoke of the US's "exorbitant privilege" in this regard.

And this privilege was not acquired peacefully: An important deal with Saudi Arabia, the largest oil producer in the early 1970s, dictating that its black gold be sold only for dollars, was secured by military supplies from the American side. This, in fact, marked the creation of the petrodollar and the world reserve currency.

Already more than a decade ago, economist Stephan Schulmeister from the Austrian Institute of Economic Research (WIFO) pointed out the programmed conflicts of interest surrounding the dollar as both a reserve and national currency. For all its talk about globalization, when pressed, the US always chooses a ruthless, self-serving monetary policy. Moreover, the economic imbalance is manifested in the fact that more than 60% of all world currency reserves are in US dollars, while only a small part of the world's goods is produced in the US.

Austrian lawyer and economist Stephan Schulmeister (* August 26, 1947), a researcher at the Austrian Institute of Economic Research (WIFO) from 1972 to 2012, was an early critic of the US dollar's role as the world's reserve currency.

Interestingly, in a publication covering the beginning of 2023, the Credit Suisse Research Institute (CSRI) found it necessary to consider how macroeconomic imbalances and geopolitical events could hasten changes in the current dollar-dominated monetary system. In particular, the development of central bank reserves up to the present and how they could be redistributed in the future were discussed, as well as – take note – how a tangible multipolar monetary system could gradually emerge.

One of the report's main conclusions is that key policymakers in both developed and emerging market economies are increasingly critical of the international monetary system, as crucial monetary policy decisions in the US have created difficulties for other countries. In particular, the CSRI concluded that a tighter monetary policy from the US negatively impacts business cycles in other countries or can even provoke crises.

There is a growing number of countries that are gradually abandoning the US dollar or at least sharply reducing their dependence on it. However, that does not mean the euro is an alternative. "Europe has lost the chance for the euro to take on the role of the US dollar," the German news station Welt quotes economist Gunther Schnabl as saying on April 20, 2023, for example.

More and more countries, not only China, Russia, and Brazil, no longer wish to finance their wars by buying US government bonds to stabilize the American financial market. According to Russian Finance Minister Anton Siluanov, more than 70% of trade transactions between Russia and China now use either the ruble or the yuan.

Economist and politician Anton Germanovich Siluanov (* April 12, 1963, Moscow) has been the Russian Minister of Finance since December 2011.

In March, the yuan hit a nearly 40% market share on the Moscow Stock Exchange, replacing the US dollar as the most traded currency. But the shift away from the dollar and the growth of the Chinese yuan is by no means limited to Russian-Chinese economic relations. Russia and India have agreed to trade oil in rupees, and the Chinese oil and gas company CNOOC and the French TOTAL have agreed for the first time to trade liquefied natural gas in yuan.

The Gulf Cooperation Council now accounts for more than 25% of global oil exports, including 17% from Saudi Arabia, whose largest buyer is now China. This could be the birth of the petroyuan. Chris Devonshire-Ellis, Chairman of Dezan Shira & Associates, points to Brazil and China's recent agreement on the use of both currencies in bilateral trade. In the end, this will affect the volume of trade, which amounts to about USD 163 billion per year.

"The world reserve currency is under pressure. Never have the dollar's opponents been stronger, never has China's attempt to assert itself been more promising," the Handelsblatt newspaper wrote on May 12. Brazilian President Lula recently discussed the creation of a common currency for BRICS and MERCOSUR countries with his Argentine counterpart Alberto Fernández. "Why can't institutions like the BRICS bank have a currency to finance trade relations between Brazil and China, between Brazil and all other BRICS countries?" he asked. "Who decided that the dollar was this currency after the end of gold parity?" Lula spoke in a similar way in April during a visit to the Shanghai-based New Development Bank.

According to the latest IMF data, the five BRICS countries currently account for 32.1% of global growth, while G7 countries contribute just 29.9%. And there are numerous applicants looking to join the BRICS alliance, which will surely impact how these numbers will shake out in the future. Among at least 19 applicant countries there are such significant regional powers as Iran, Argentina, Turkey, the United Arab Emirates, Egypt, Indonesia, and Kazakhstan. Even Saudi Arabia and Mexico are considering joining.

Bilateral trade between Russia and Bolivia will also be conducted in the Bolivian national currency in the future, which cannot be underestimated, given Russia's role in the development of Bolivia's huge lithium deposits.

Moreover, finance ministers and heads of central banks from ASEAN member countries met in Indonesia on March 28 to discuss how developments to the system of cross-border digital payments could facilitate a transition to conducting business in the national currency.

Although the dollar is not expected to lose its reserve currency status overnight, there can be no doubt about its unprecedented fall. Indeed, in 2022, the dollar's share in world reserve currencies was falling at a rate ten times faster than the average over the previous two decades.

This should make the Fed's inflationary money printers stop and think.

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