De-dollarization now looks inevitable and threatens to become a national security concern, according to International Crisis Group co-chair Frank Giustra.
A Business Insider report — “De-dollarization is no longer a matter of if, but when — and is a national security concern, says International Crisis Group cochair”, May 3, 2023, — said:
In commentary published in Responsible Statecraft, Frank Giustra said the idea that the dollar could lose its dominance was unthinkable in most of the developed world until the U.S. and its allies froze Russia’s currency reserves and shut it out from the SWIFT system after Moscow launched its war on Ukraine.
Growing Resistance To Dollar
That set off growing resistance to the dollar, Giustra said, with a number of countries installing non-dollar trade agreements while a BRICS plan for its own currency has re-emerged.
“Financial systems are built on trust and, if they are weaponized, they lose the trust necessary to retain their dominance,” he said.
Viewing the Russian sanctions as a cautionary tale, central banks have begun reducing their dollar reserves, while accumulating gold.
Drop In Dollars Value
A drop in the dollar’s value may also be of interest to the rest of the world, as most sovereign debt is held in the U.S. currency. And given the greenback’s current levels, this makes debt hard to manage, Giustra added.
At the same time, an expensive dollar elevates commodity prices, effectively forcing developing nations to import U.S. inflation.
“Despite America’s likely opposition, de-dollarization will persist, as most of the non-Western world wants a trading system that does not make them vulnerable to dollar weaponization or hegemony. It is no longer a question of if, but when,” he said.
But a sudden drop in dollar demand could provoke a domestic inflationary surge, even risking hyperinflation.
Rupture U.S. Social Fabric
That would spark a debt and money-printing cycle that could rupture the U.S. social fabric, he warned.
“In short, any U.S. administration would ultimately consider any such de-dollarization moves to be matters of national security,” Giustra said.
To avoid this, the U.S. should be open to any dialogue about the formation of a new monetary system. A new global currency regime could be backed by gold or other commodities, though he acknowledged the U.S. could find it politically unpalatable.
Quite Chaotic
The report said:
“A multipolar monetary system might provide a more equitable playing field to poorer countries and just may give the U.S. and the world longer-term economic and political stability,” Giustra wrote. “The likely outcome of this would still be quite chaotic and involve a drop in the standard of living for Americans.”
Meanwhile, other commentators have dismissed the threat of de-dollarization, saying the dollar’s strength would be difficult to replicate and replace.
Elon Musk, Ray Dalio, and others top voices have said about the anti-dollar drive
Another Business Insider report — De-dollarization is undeniable, and the debate about the greenback’s dominance is heating up. Here’s what Elon Musk, Ray Dalio, Chamath Palihapitiya and 7 others are saying., May 1, 2023, https://markets.businessinsider.com/news/currencies/dedollarization-currencies-elon-musk-ray-dalio-chamath-palihapitiya-2023-5 — said:
The de-dollarization movement is gathering global momentum, with an increasing number of nations from Asia to Europe and Latin America lining up plans to end the greenback’s dominance of global trade and investment flows.
The report said:
The acceleration of the anti-dollar drive has seen the yuan overtake its US counterpart as the most used currency for Chinese cross-border transactions. It is also Russia’s most traded currency since Moscow was largely pushed out from global finance following its war with Ukraine.
And while Goldman Sachs thinks attempts to undercut the dollar’s supremacy will remain contained and constrained for years to come, other influential figures have adopted a more bearish view on the greenback.
Elon Musk
The Tesla and SpaceX CEO has warned against weaponizing currencies like the U.S. has done with its economic sanctions, and suggested the de-dollarization trend may be linked to that.
In a tweet on Tuesday, he responded to a video post by economist Peter St Onge, in which the latter highlighted that “de-dollarization is real and is happening fast.”
“Dollar share went from 73% (2001) to 55% in (2020). Went from 55% to 47% since sanction launched on Russia, now de-dollarizing at 10x faster than the previous two decades,” Onge said.
Musk responded: “If you weaponize currency enough times, other countries will stop using it.”
Ray Dalio
“Dollars are debt. In other words, when one holds a dollar — a central bank — they hold a debt asset,” Ray Dalio, the Bridgewater Associates founder, recently said. “So the holders of that would say, ‘I’m already over-exposed to U.S. dollar-denominated debt.’ And so there’s less of an eagerness to buy.”
Western sanctions against Russia have frozen $300 billion worth of its central bank’s assets, preventing Moscow from transacting in dollar- or euro-based assets. Those sanctions “increased the perceived risk that those debt assets can be frozen in the way that they’ve been frozen for Russia,” Dalio said.
“So for those reasons, there is less desire to hold U.S. dollar-denominated debt, which means yes, less U.S. dollars,” he added. “So the supply-demand picture is worsening particularly as we continue to have to sell them internationally to fund the deficit.”
Emmanuel Macron
France’s Macron urged that Europe must reduce its dependence on the “extraterritoriality of the U.S. dollar” in a Politico interview this month.
The bombshell remarks came as the president stressed Europe should avoid getting tangled in tensions between China and the U.S. “If the tensions between the two superpowers heat up … we won’t have the time nor the resources to finance our strategic autonomy and we will become vassals,” he said.
Chamath Palihapitiya,
While the China’s yuan in trade deals is increasing, Chamath Palihapitiya, venture capitalist, said it’s unlikely to erode the dollar’s dominance.
“This whole thing is a huge nothingburger,” he said in a recent episode of the All-In Podcast.
“Until [the yuan] is unpacked in a free-floating currency, we will never know what the real market clearing price is,” Palihapitiya said. “China has been very effectively able to manipulate this currency since they were brought into the WTO, in order to engender that trading partner status,” he continued, adding that the dollar will remain the “canonical” flight to safety.
Stanley Druckenmiller
Billionaire investor Stanley Druckenmiller recently shared he is shorting the US dollar after missing out on last year’s rally. In an interview with the Financial Times, he said he felt confident taking a bearish position against the greenback due to the prospect of U.S. interest-rate cuts, a rise in non-dollar trade agreements, and the dollar’s weaponization.
“One area I am comfortable is I am short the U.S. dollar,” the Duquesne Capital founder told the outlet. “Currency trends tend to run for two or three years. We have had a long [run] higher.”
Jeremy Allaire,
“If we want to make the dollar safer and more competitive, we need to do two things,” Jeremy Allaire, the Circle CEO, said in a tweet.
“Unleash it is power as a native data type on the internet, that can be openly used and integrated” and “remove the underlying bank lending IOU risk on electronic money, and separate payment tokens from lending tokens,” he added.
Goldman Sachs
De-dollarization is “lots of talk (again), not a lot of action,” the bank’s strategists wrote in a note.
“[P]art of the Dollar’s declining share can likely be attributed to regular market forces as Treasuries fell and Asian central banks sold their Dollar holdings to counter the stronger Dollar last year,” strategists said.
“While that is a clear risk if the U.S. abuses its ‘exorbitant privileges’, we see no evidence of that in the data so far (for example, even Brazil’s rising share of CNY reserves replaced CAD, not the Dollar), and our strong view is that there is currently no real contender,” they added.
Joseph Sullivan,
According to Joseph Sullivan, former White House economist, the dollar’s dominance could be seriously threatened by a currency issued by Brazil, Russia, India, China and South Africa.
“The BRICS would also be poised to achieve a level of self-sufficiency in international trade that has eluded the world’s other currency unions,” he said. “Because a BRICS currency union — unlike any before it — would not be among countries united by shared territorial borders, its members would likely be able to produce a wider range of goods than any existing monetary union.”
“Either way, the dollar’s reign isn’t likely to end overnight—but a [BRICS currency] would begin the slow erosion of its dominance,” he said.
Stephen Jen
“The prevailing view of ‘nothing-to-see-here’ on the U.S. dollar as a reserve currency seems too innocuous and complacent,” Stephen Jen, who coined the “Dollar Smile” theory, wrote in a note, per Bloomberg.
“What needs to be appreciated by investors is that, while the Global South is unable to totally avoid using the dollar, much of it has already become unwilling to do so,” the Eurizon SLJ CEO and former Morgan Stanley currency guru said.
Anwar Ibrahim
“There is no reason for Malaysia to continue depending on the dollar,” Malaysian prime minister Anwar Ibrahim said earlier this month.
He added that Malaysia and China are already in talks to utilize the ringgit and renminbi for trade deals.
Asia Spearheads Anti-dollar Drive
Another Business insider report — The anti-dollar drive spearheaded by Asia has spread to Europe, with France growing sour on the greenback’s dominance. Here are 6 rising threats to the buck’s supremacy of global trade, April 19, 2023,
https://markets.businessinsider.com/news/currencies/dollar-dominance-russia-china-india-brazil-oil-trade-reserve-currency-2023-1?utm_medium=referral&utm_source=yahoo.com –said:
The dollar’s dominance of global trade and investment flows is facing a slew of new threats as more and more countries draft plans to boost the use of alternative currencies.
For some time now, nations from China and Russia to India and Brazil have been pushing for settling more trade in non-dollar units – with projects ranging from the use of local currencies to a gold-backed stable coin and a new BRICS reserve currency.
Now, even Europe appears to be jumping on the anti-dollar bandwagon, with French president Emmanuel Macron recently warning against the continent’s dependence on the greenback.
With movements to undermine the dollar’s unipolar supremacy gathering momentum, it comes as no surprise that the buck’s status as a reserve currency eroded in 2022 at 10 times the pace seen in the past two decades, according to Eurizon SLJ Asset Management.
Strategists at the asset manager found that the greenback’s share of total global reserves fell to 47% last year, from 55% in 2021 and as much as two-thirds in 2003.
For decades, the U.S. dollar has reigned supreme as the world’s reserve currency and is widely used in crossborder trade, especially for commodities such as oil. Thanks to its relative price stability, investors see it as a safe-haven asset in times of heightened economic and geopolitical uncertainty.
The dollar was further bolstered last year by a surge in U.S. interest rates that made it attractive to foreign investors seeking higher yields. It surged 17% during the first nine months of 2022, but has since lost some of its shine on the prospect that the U.S. Federal Reserve may soon end its rate hikes as inflation cools rapidly.
Against this backdrop come the latest threats to the greenback’s reign — here are 6 currency projects from across the world that are ultimately aimed at undermining the dollar’s supremacy.
France calls for reduced dependence on the U.S. dollar
In an interview with Politico, France’s Macron urged that Europe must reduce its dependence on the “extraterritoriality of the US dollar.”
His comments came quickly on the heels of a much-watched trade deal between French multi-energy conglomerate TotalEnergies and China’s national oil company CNOOC – the Asian nation’s first-ever liquefied natural gas transaction settled in the yuan.
China pushes for the yuan to replace the dollar in oil trades
China has been looking to weaken the dollar’s dominance by pushing for the yuan to replace the greenback in energy deals, given its increased trade with Russia after it invaded Ukraine.
The move seeks to chip away at the petrodollar regime in place since the 1970s, where global oil transactions are largely settled in dollars.
Toward the end of last year, Beijing began buying Moscow’s crude at steep discounts, completing those purchases in yuan rather than dollars, giving rise to the so-called petroyuan.
With a stronger greenback, oil contracts become more expensive because the deals are largely priced in the U.S. currency, and this also explains China’s shift away from the dollar.
Kpler analyst Viktor Katona said Russia has effectively become “an Asian nation that in my opinion has introduced the yuan into large-scale oil trade.”
Billionaire investor Ray Dalio also chimed in on Beijing’s anti-dollar drive, saying global central banks are less willing to hold the dollar with China increasing global trade in yuan.
Malaysia, China Weigh Launching An Asian Monetary Fund
At the same time, Malaysia has launched talks with China on forming an Asian Monetary Fund in a bid to de-link from the dollar, according to Bloomberg.
“There is no reason for Malaysia to continue depending on the dollar,” the country’s prime minister Anwar Ibrahim said earlier this month. He added that Malaysia and China are already in talks to utilize the ringgit and renminbi for trade deals.
An Asian Monetary Fund was initially proposed in the 1990s, but the concept did not gain much traction.
“But now with the strength of the economies in China, Japan and others, I think we should discuss this — at least consider an Asian Monetary Fund, and, secondly, the use of our respective currencies,” Anwar said.
Russia and Iran eye a gold-backed stablecoin
Russia and Iran are working together on a cryptocurrency backed by gold — a ‘stablecoin’ that could replace the dollar for payments in international trade.
The two countries, both of which have been hit by Western sanctions, want to issue a “token of the Persian region” for use in crossborder transactions, with a plan to launch it in a special economic enclave in Astrakhan in southern Russia, which already handles Iranian shipments.
But the project can move forward only once Russia’s market for digital assets is fully regulated, according to a Moscow lawmaker.
Russia and Iran have stepped up their push to “de-dollarize” in recent months, according to think tank the Jamestown Foundation. They aim to increase their volume of trade to $10 billion per year via moves such as developing an alternative international payments system to SWIFT, which they are banned from.
Brazil and Argentina plan a common currency
Brazil and Argentina recently announced they are gearing up to launch a joint currency, named the “sur” (south), that could eventually become a euro-like project embraced by all of South America.
A common currency could help boost South American trade, the countries’ leaders said in a joint statement, because it evades conversion costs and exchange rate uncertainty. That could erode the dollar’s dominance in the region, given the greenback accounted for as much as 96% of the trade between North and South Americas from 1999 to 2019, according to the Federal Reserve.
UAE, India look at using rupees in non-oil trade
Meanwhile, the United Arab Emirates and India have floated the idea of conducting non-oil trade in rupees.
The move would build on a free trade agreement signed last year, which aims to boost trade excluding oil between the two countries to $100 billion by 2027.
China has also pondered on the idea of settling non-oil trade in local currencies that exclude the greenback, according to minister of state for foreign trade of the UAE Thani bin Ahmed Al Zeyoudi.
Russia, China propose a new reserve currency
Last year, Russia and China kickstarted talks to develop a new reserve currency with other BRICS countries in a challenge to the dollar’s dominance.
The new reserve unit would be based on a basket of currencies from the group’s members: Brazil, Russia, India, China, and South Africa.
The dollar’s reign as the chief reserve tender is already on the wane as central bankers diversify their holdings into currencies like the Chinese yuan, the Swedish krona and the South Korean won, according to the International Monetary Fund.