The Sunday Mail
A REBELLION is brewing.
The United States dollar has ruled the financial world for nearly eight decades since the end of World War II.
Now, another war is setting the stage for many countries to explore a move away from the dollar for trade, raising questions over the currency’s future dominance.
Russia’s special military operation in Ukraine in February 2022 triggered a wave of US-led financial sanctions against Moscow.
A bank employee counts Chinese yuan notes next to US dollars at a Kasikornbank in Bangkok, Thailand. Several countries are looking to move away from their dollar dependence.
The two most powerful among them have been the decision by Western governments to freeze nearly half (US$300 billion) of Russia’s foreign currency reserves and the removal of major Russian banks from SWIFT, an interbank messaging service that facilitates international payments.
These sanctions, which some have called the “weaponisation” of the dollar, have predictably made Russia and China, the two biggest geopolitical rivals of the US, promote their alternative financial infrastructures.
But it is not just Beijing and Moscow.
From India to Argentina, Brazil to South Africa and the Middle East to Southeast Asia, nations and regions have accelerated efforts in recent months towards arrangements aimed at reducing their dependence on the dollar.
At the heart of these de-dollarisation initiatives is the fear in many capitals that the US could someday use the power of its currency to target them the way it has sanctioned Russia, according to political economists and sanctions experts.
So, can these moves actually dethrone the currency, often referred to as “King Dollar” in financial circles, from its perch as the top dog in global trade?
The short answer is: The dollar’s dominance is unlikely to change in the near future, and it will remain the principal currency of international trade and transactions, analysts told Al Jazeera.
No other currency is close to replacing it.
But its stranglehold on the global financial system could weaken if more countries start trading in other currencies and reduce their exposure to the dollar.
How the dollar became
— and stayed — king
A majority of global trade takes place in dollars, which took centre stage towards the end of World War II.
In 1944, representatives of 44 nations met in Bretton Woods, New Hampshire, to repair the world economy after the war.
It was agreed that the US, as the world’s largest economy, would fix the value of the dollar to gold and other countries would in turn peg their currencies to the dollar.
Countries now had to hold dollars in reserve to maintain their exchange rate, making it the dominant global currency.
The Bretton Woods regime collapsed by the 1970s because the US no longer had sufficient gold to back its dollars.
Still, the dollar was by then deeply entrenched as the reserve currency used by other nations.
The US’ deep and flexible financial market, comparatively transparent corporate governance norms and the dollar’s stability ensured that the currency has remained dominant, even though countries are no longer obligated to fix their currencies to the dollar.
To be sure, talk of de-dollarisation isn’t new.
Questions about the dollar’s dominance arose when the Bretton Woods system fell apart, when the European Union launched the euro in 1999 and then again after the 2008-2009 financial crisis.
The dollar’s dominance survived those storms. Today, nearly 60 percent of foreign exchange reserves maintained by the world’s central banks are held in dollars.
Still, that marks a decline from about 70 percent in 2000, pointing to a gradual shift within the global financial order, according to experts. While the euro’s share has gone up only marginally since its launch – from 18 percent to just under 20 percent now – China’s renminbi, also known as the yuan, has grown the fastest since 2016, even though less than 3 percent of global reserves are held in that currency.
“We are clearly moving towards a more multilateral world as shown by the falling share of the US dollar in forex reserves,” Alicia García Herrero, a senior fellow at the Brussels-based think tank Bruegel, told Al Jazeera.
Over the past year, the incentives for countries to turbocharge that shift away from the dollar have only increased.
The financial world’s ‘nuclear option’
The US-led sanctions freezing Russia’s ability to use half of its reserves as well as limiting the ability of Russian banks to conduct transactions using the critical SWIFT system have spooked many countries, experts said, giving new impetus to efforts at de-dollarisation.
“The accelerator this time really is the sanctions imposed on Russia,” said Zongyuan Zoe Liu, a fellow for international political economy at the New York-based Council on Foreign Relations. She described the decision to kick Russia out of the SWIFT system as “like using the nuclear option” in the finance world. — Aljazeera
