What is driving the trend toward de-dollarization?

By | May 1, 2023

By Kostas Raptis

“Every day I ask myself: why do all countries trade through the dollar? Why don’t we do this with our own coins? Who decided that after abandoning the gold standard, the international currency should be the dollar and not the yuan, real or peso? asked Brazilian President Lula da Silva rhetorically during his recent visit to the headquarters (under his predecessor, Dilma Rousseff) of the BRICS New Development Bank in Shanghai.

It is not a recent or passing obsession. In an interview he gave in 2019, while he was still in prison, Lula confided that the reason the BRICS group was created (during his first term as president) was “to create our own currency and become independent from the dollar.”

And if this sounds like cheap rhetoric, there is always the reality of the concrete movements.

Brazil has signed an agreement with China to boost bilateral trade in national currencies. The ASEAN (Association of Southeast Asian Nations) countries discussed at length at their meeting last month at the level of finance ministers and central bankers about reducing their dependence on the dollar, the euro, the yen and the pound sterling, in direction to adopt cash transactions in local currencies. and the use of local payment systems.

In early April, news broke that India and Malaysia had adopted settling transactions between them in Indian rupees. On a recent visit to China, Malaysian Prime Minister Anwar Ibrahim reportedly proposed the establishment of an “Asian Monetary Fund” to reduce dependence on the dollar.

Similarly, a meeting of delegations from the finance ministries of Bangladesh and Russia agreed to pay for the Rooppur nuclear power plant project in yuan to circumvent the blocking of the Russian part of the dollar-operated SWIFT system. The refund will be made through a Chinese bank, using the Chinese CIPS interbank system, which is promoted as an alternative to SWIFT.

Even traditional US allies like Saudi Arabia (a mainstay of the “petrodollar” system) are changing their minds, judging by Riyadh’s willingness to experiment with conducting some of its oil trade with China in petroyuan. .

In addition, in March, the Shanghai Oil and Natural Gas Exchange completed the first purchase and sale of LNG, originating in the United Arab Emirates, in yuan, with the French company Total as an intermediary.

The dollar represents 58% of international currency reserves, more than double that of the euro, which ranks second. The emergence of a single competitor capable of “dethroning” it seems like a far-fetched proposition.

However, this does not mean that lately stakeholders have not increasingly sought to diversify their options. The two powers that hold the most US Treasuries, namely China and Japan, last year reduced their relative exposure by $400 billion, which is half the US defense budget. China’s share, in particular, is at a 12-year low (849 billion in Treasuries).

On the other hand, gold is becoming more and more attractive. In January, the World Gold Council announced that by 2022 global central bank demand for gold reached the highest level since 1950. China, Russia and other emerging economies are key buyers, while the digital yuan launched by the chinese central bank builds infrastructure for further acceleration of de-dollarization.

There are long-term objective processes behind this trend. China is the largest importer of goods and the number one trading partner of 120 countries: for 61 of them the first position is for both imports and exports, while for the US the same is true for only 30 countries.

On the other hand, the over-indebtedness of the US is a factor that, even though it is repelled from the minds of traders, cannot but appear more and more on the depths of the “radar”. reaches 32 trillion dollars and is expected to reach 44 trillion in 2027. Public debt has jumped from 60% of GDP to 130% in the last twenty years and it is estimated that it will reach 150% in 2027. And there are many those who are in possession of an increasingly reduced offer to finance it to the extent that this translates into a civil-military aggression against them.

Because the main reason why de-dollarization philology is gaining ground is primarily (geo)political. Turning the US privilege of issuing international currency into a weapon of foreign jurisdiction lobbying and projection gives US competitors the incentive to consider alternatives that would not be their immediate priority. In an environment where a tenth of countries are under US sanctions and any third party is forced (for fear of secondary sanctions) to avoid doing business with non-hostile powers, the unrest can only intensify. By overdoing it, the United States is accelerating exactly what it is trying to avoid: the challenge of its monetary hegemony.

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