Uncertain future of the US Dollar as International Reserve Currency
By Josef Kefas Sheehama.
Historically, international trade had been facilitated by the acceptance of a single currency for the exchange of goods and services between countries.
However, more recently, geopolitical tensions have become another driver in this trend, seeking to replace the dominant US Dollar with competing currencies for international trade. The constant weaponization of the global economic system has caused a few countries to look to alternative payment arrangements to continue to trade with sanctioned countries. Both Russia and China have already created alternative payment systems in the form of local equivalents of SWIFT such as CIPS and SFPS.
All countries will now have to consider their foreign currency reserves in light of their foreign policy. In other words, the economic challenges posed by various countries during the last decade, such as the creation of the BRICS bank, are a reaction to poor American economic policy. In the wake of Russia’s invasion of Ukraine, the US Government has launched its most aggressive sanctions campaign ever. Russia had been accumulating foreign currency reserves for precisely the sort of crisis its economy faced when Western countries responded to the Russian invasion with economic sanctions.
Furthermore, China, India, Iran, and Turkey, among other countries, announced, or already are, doing business with Russia in their local currencies instead of the US dollar. These countries represent a market of over three billion people that no longer need to use the US Dollar to trade with one another. Over time, however, if de-dollarization gains traction, there could be implications for the US economy, US sanctions, and US global economic leadership.
The BRICS countries continue to flex their muscles. A new agreement will promote the use of their own national currencies when trading with each other rather than the US dollar. Leaders from both Russia and China have been strongly advocating a new global reserve currency for several years, and both nations seem determined to break the power that the US Dollar has over international trade. China became Africa’s biggest trading partner, and China is now aggressively seeking to expand the use of Chinese currency on the African continent.
Furthermore, the United States dollar was designated the world reserve currency in the Bretton Woods Agreement. The US held a prominent position in the world economy and a substantial share in international trade. Conventional measures of the dollar as a reserve currency show little erosion of its preeminent status. As the US Dollar continued to lose purchasing power, several oil-producing countries began to question the wisdom of accepting increasingly worthless paper currency for their oil supplies. Additionally, other nations are choosing to use their own currencies for oil like China, Russia, and India, among others. As more countries continue to move away from the petrodollar system which uses the US Dollar as payment for oil, we expect massive inflationary pressures to strike the US economy.
The US Dollar is likely to remain the world’s reserve currency for the foreseeable future but its depreciation is a sign that the US no longer commands the global trust and confidence that it once had. My opinion is that, the dollar’s sharp decline in value speaks to vulnerabilities in the US economy. At the same time, China’s structural reform goes away from a manufacturing economy to a more service-oriented economy with a stronger consumer base. This could mean the days of the US Dollar being the world’s reserve currency are numbered. Even so, the dollar’s share of official foreign exchange reserves has declined from a little over 70% in 2000 to a little less than 60% today, according to the Bank for International Settlements.
That downtrend could gather momentum in the years ahead, especially with the US currently leading the charge in de-globalization and decoupling. To my mind, an African single currency will contribute positively to the necessary structural development process on the African countries.
Africa needs to move to a Single Currency to boost intra-continental trade and move away from depending on other currencies. It is beyond any doubt that the introduction of an African single currency implies a very important step forward in the long process to African integration, not only when seen from an economic point of view, but also politically. The introduction of an Africa single currency will halt the use of other currencies.
A global currency would be a major blow to national sovereignty and would represent a major move to global government. The truth is, however, that there are some very powerful interests that are absolutely determined to create a global currency and a global central bank for the global economy that we now live in.
Even though it is unlikely that the US Dollar will be dethroned as the world’s reserve currency any time soon, I caution the world to be alert when the time comes. Gold, silver, other precious metals and especially cryptocurrencies, offer alternative safe wealth stores to grow your money in these interesting times that we find ourselves in.
To this end, China and Russia’s multi-year, multi-pronged efforts to de-dollarize have yielded minimal changes to date. However, if they are able to more significantly reduce their use of the dollar in the future by expanding non-dollar trade or developing a digital currency, there could be implications for the US.
Notwithstanding the dollar’s ongoing dominance, the competitive environment is unmistakably intensifying as a result of economic, political, and technological factors. International competitors such as Russia and China routinely call for a new international financial order and work aggressively to displace the dollar at the apex of the current regime.
International critics of the dollar’s reserve currency status are not new. The availability of alternatives in rival currencies and new technologies combined with the concerted actions among adversaries and allies alike, will eventually establish non–dollar based alternative infrastructures and international financial arrangements.
Only once before has a dominant currency been unseated, when the dollar took over from sterling. Such a dramatic shift in the global geopolitical order is unlikely to arrive any time soon; in fact, for now, the pandemic will strengthen the currency’s dominance. But the weakening of the dollar suggests that this geopolitical order is nonetheless beginning to fray at the edges. The US should treat it as a warning. By relinquishing global leadership and damaging the credibility of its own institutions, the US risks forfeiting its exorbitant privilege once and for all.