‘King’ dollar: its economic influence and chances of being dethroned

Symbol of the economic power of the United Statesyes, the dollar is far from dethroned as ‘king’ of currencies despite criticism and challenges from those who oppose its hegemony in world trade and finance.

(See: What is the ‘blue dollar’ and why its value shakes the Argentine economy).

It is very difficult to do without the dollar when buying barrels of oil or planes and in the issuance of debt in international markets.

There are more and more calls and initiatives to reduce dependence on the greenback, such as the one formulated by Brazilian President Luiz Inácio Lula da Silva on his recent trip to China.

“Why are all countries forced to do their trade tied to the dollar? (…) A country needs to run after the dollar when it could export in its own currencyLula said in China.

(See: The dollar and its future: will it shoot up after Ocampo’s departure?).

The Brazilian president’s statement came shortly after signing a deal with beijing to carry out commercial exchanges in yuan and reais.

Bangladesh recently announced payment in yuan of a nuclear plant to Russia and China canceled a delivery of liquefied natural gas in its own currency to the French TotalEnergies.

In addition, last Wednesday, April 26, Argentina announced that it will pay in yuan for imports from China, with the aim of preserving its dollarized international reserves, within the framework of a mechanism of ‘swap’ or currency exchange which Buenos Aires and Beijing already had.

In Argentina, the dollar is a refuge value for the population and companies in the face of strong inflation that exceeds 100% in 12 months.

(See: Dollar: appreciation of the yen or yuan would cause its price to continue falling).

“There is a desire to be less dependent on the dollar in many developing countries, particularly for trade“he told the agency. AFP Paola Subacchi, Professor of International Economics at Queen Mary University of London.

These countries “they realize that the dollar is too dominant“especially China,” he added.

The ‘exorbitant privilege’ of the dollar, in the words of French President Valéry Giscard d’Estaing (1974-1981), gives the United States competitive advantages in trade and to finance their deficits.

At the same time, developing countries are affected by movements in the US currency, which marks heyou prices of its exports and imports.

(See: Investing in dollars: what you should know in the short and long term).

Interest rates in the United States have, in turn, consequences on the cost of debt that contract in dollars.

The dollar is also a weapon that the United States uses to obtain geopolitical advantages: When the US government imposes economic sanctions on a country, it forces foreign companies that use the dollar to abide by its restrictions on pain of being fined.

“The United States uses the hegemony of the dollar to sanction Russia. Others are concerned about being penalized, and decide to opt for other currencies.“, he summed up the AFP Larry Yang, chief economist at investment firm First Seafront, in Shenzhen, China.

French President Emmanuel Macron expressed his concern about the “extraterritoriality of the dollar“, in dialogue with journalists after returning from a recent visit to China.

Second world economy and great political rival of the United States, China has been internationalizing its currency for years. But the yuan lacks an important element that the dollar does: free convertibility.

And it is that the Chinese currency is widely regulated by the power in Beijing.

Exchange market.

EFE

Today, “no currency can compete with the dollar“Subacchi says.

(See: Dollar: uncertainty, the factor that influences its volatility).

The reserves held by central banks show a progressive drop in the dollar’s share in their composition, which went from 71% of the total in 1999 to 59% in 2021, according to an IMF report published in 2022.

The decrease is due to ‘small’ currencies (other than the euro, the yen or the pound sterling) increased their participation in that basket to 10% of the total by 2021.

The green ticket currently represents the 42% of currencies used for international trade, against 33% for the euro, 6% for the British pound, 5% for the yen and barely 2% for the yuan, according to the latest data from the international payment system Swift.

“Can we progressively move towards an alternative currency? Yeah“, considers Alessandra Ribeiro, an economist at the Brazilian consultancy Tendências Consultoria, in Sao Paulo.

“But the entire structure that the United States offers in terms of security and institutionality should be proposed“for others, he adds, citing a stable central bank and governance, clear inflation targets, and some investor protection.

AFP