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.
Geopolitical actions are another driver of this trend; the constant weaponisation of the global economic system has caused a few countries to look towards alternative payment arrangements to continue to trade with sanctioned countries.
Both Russia and China have already created alternative payment systems, ranging from local equivalents of the SWIFT such as the CIPS and the SFPS to a local. 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 conflict with 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 Russia’s military operation in Ukraine 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-dollarisation efforts gain traction, there could be implications for the US economy, US sanctions, and US global economic leadership. The BRICS continue to flex their muscles. A new agreement will promote the use of their national currencies when trading with each other rather than the US dollar. Leaders from both Russia and China have been strongly advocating for 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 the increasingly worthless paper currency for their oil supplies.
Additionally, other nations are choosing to use their currencies for oil, 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; its depreciation is a sign that the US no longer commands the global trust and confidence that it once did. My opinion is that the dollar’s sharp decline in value speaks to vulnerabilities in the US economy. China’s structural reform goes away from a manufacturing economy. Instead, it comes into 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-globalisation and decoupling. To my mind, the African single currency will contribute positively to the necessary structural development process in African countries. Africa needs to move toward 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 the African single implied a very important step forward in the long process toward African integration, not only when seen from an economic point of view, but also politically. The introduction of an African 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 toward global government. The truth is, however, that some very powerful interests are determined to create a global currency and a global central bank for the global economy that we now live in. Further evidence that the dollar is losing its grip on global dominance can also be found in its declining share of total global foreign-exchange reserves in recent years. According to the International Monetary Fund (IMF), the dollar’s share has declined from 64.7% in the first quarter of 2017 to just under 62% in the first quarter of 2020, which itself was a recovery from a low of 60.9% in fourth-quarter 2019. Even though it is unlikely that the US dollar won’t be dethroned as the world’s reserve currency any time soon, I caution the world to be ready when the time comes. Gold, silver precious metals and especially cryptocurrencies are the safe bet to store and grow your money in these interesting times that we find ourselves living in.
To this end, China and Russia’s multi-year, multi-pronged efforts to de-dollarise have yielded minimal changes to date. However, if they can 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 as the APEX of the current regime. International critiques 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 to establish non–dollar-based alternative infrastructures and international financial arrangements.
Only once 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.
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 institutions, the US risks forfeiting its exorbitant privilege once and for all.