(Bloomberg) — King Dollar is facing an uprising.
Most read from Bloomberg
Tired of the overly strong and newly weaponized greenback, some of the world’s largest economies are looking to disrupt the US currency.
Smaller countries, including at least a dozen in Asia, are also experimenting with de-dollarization. And corporations around the world are selling an unprecedented portion of their debt in local currencies, wary of the dollar’s strength.
No one is saying that the greenback will soon be dethroned from its reign as the primary medium of exchange. Calls for a “peak dollar” have repeatedly proven premature. But not so long ago, it was almost unthinkable for countries to explore payment mechanisms that bypass the U.S. currency or the SWIFT network that underpins the global financial system.
Now, the sheer power of the dollar, its use under President Joe Biden to enforce sanctions on Russia this year, and new technological innovations are all coming together to encourage countries to began to relinquish its hegemony. Treasury officials declined to comment on these developments.
John Mauldin, investment strategist and president of Millennium Wave Advisors with more than three decades of market experience, wrote in a news release last week: “The Biden administration made the mistake of weaponizing the dollar. America and the global payment system. “That will force non-American investors and nations to diversify their holdings outside of the traditional safe-haven of the United States.”
Bilateral payment
Plans already underway in Russia and China to promote their currencies for international payments, including through the use of blockchain technologies, accelerated rapidly after the invasion of Ukraine. . For example, Russia began to seek remuneration for its energy supply in rubles.
Soon, countries such as Bangladesh, Kazakhstan and Laos are also stepping up negotiations with China to promote the use of the yuan. India is starting to speak out more strongly about the internationalization of the rupee and just this month, started to secure a bilateral payment mechanism with the United Arab Emirates.
However, progress seems slow. For example, renminbi accounts have not gained traction in Bangladesh due to the country’s large trade deficit with China. Salim Afzal Shawon, head of research at Dhaka-based BRAC EPL, said: “Bangladesh has tried to pursue de-dollarization in trade with China, but the trend is This is almost one-way.
The main driver of those plans is the move by the United States and Europe to cut off Russia from the global financial messaging system known as SWIFT. This move, described by the French as a “financial nuclear weapon”, alienated most of Russia’s major banks from their networks that support tens of millions of transactions per day, forcing them to rely on the much smaller than its own.
That has two implications. First, U.S. sanctions on Russia raised concerns that the dollar could become a more permanent political tool — a concern shared in particular by China, which beyond Beijing and Moscow. For example, India has been developing its own homegrown payment system, which will partially mimic SWIFT.
Second, the U.S. decision to use the currency as part of a more aggressive form of economic management has put additional pressure on economies in Asia to choose sides. Without any alternative payment systems, they run the risk of being forced to comply with or enforce sanctions with which they may disagree — and lose the opportunity to transact with key counterparties. important.
“The complicating factor in this cycle is the wave of sanctions and seizure for USD holdings,” said Taimur Baig, managing director and chief economist at DBS Group Research in Singapore. “Given this backdrop, steps in the region to reduce dependence on USD are not surprising.”
Just as officials across Asia do not want to pick a winner in the disputes between the US and China and want to keep relations with both, US sanctions on Russia are prompting governments to follow suit. their own path. Sometimes the action takes on a political or nationalist tone — including outrage at Western pressure to impose sanctions on Russia.
Moscow sought to convince India to use an alternative system to maintain transactions. A spokesman for Myanmar’s military junta said the dollar was being used to “bullying smaller countries”. And Southeast Asian countries have pointed to this episode as a reason to trade more in local currencies.
“Sanctions make it harder – by design – for countries and companies to stay neutral,” said Jonathan Wood, head of global risk analysis at Control Risks. in geopolitical confrontations. “Countries will continue to consider their economic and strategic relationships. Companies are caught in the crossfire more than ever and face ever more complex compliance obligations and other conflicting pressures.”
It is not just sanctions that help accelerate the trend towards de-dollarization. The strong US currency also made Asian officials more active in their efforts to diversify.
The dollar has strengthened about 7% this year, on track for its biggest annual gain since 2015, according to Bloomberg’s dollar index. The index hit a record high in September as a stronger dollar pushed everything from the British pound to the Indian rupee to historic lows.
Severe headache
The strength of the dollar is a headache for Asian nations, which have seen rising food prices, growing debt burdens and growing poverty. deeper.
Sri Lanka is a case in point, defaulting on a dollar debt for the first time as a soaring greenback crippled the nation’s solvency. Vietnamese officials have at times blamed the rising dollar for fuel supply difficulties.
As a result, moves like India’s deal with the UAE spur a long-term campaign to trade more in rupees and establish trade settlement arrangements that bypass the US currency.
Meanwhile, dollar-denominated bond sales by non-financial firms fell to a record low of 37% of global sales in 2022. They accounted for more than 50% of debt sold in any year in some cases over the past decade.
While all of these measures are likely to have a limited impact on the market in the short term, the end result could be a weakening of demand for the dollar. For example, the share of the Canadian dollar and the Chinese yuan in all currency transactions is gradually getting higher.
Technological progress is another factor facilitating efforts to move away from the greenback.
Some economies are cutting back on the use of the dollar as a by-product of efforts to build new payment networks — a campaign that dates back to before the greenback rose in value. Malaysia, Indonesia, Singapore and Thailand have established trading systems with each other in their local currencies instead of the dollar. Taiwanese can pay using the QR code system linked to Japan.
Collectively, these efforts are driving momentum further away from the Western-led system that has underpinned global finance for more than half a century. What is emerging is a three-tier structure with the dollar remaining at the top, but strengthening bilateral payment routes and alternative sectors such as the yuan that seek to capture any potential encroachment. any capacity of the United States.
And for all the hysteria and action going on, it doesn’t look like the dollar’s dominance will be challenged anytime soon. The strength and size of the US economy remains unchallenged, Treasuries remain one of the safest ways to store capital, and the dollar makes up a large portion of foreign exchange reserves.
For example, the renminbi’s share of all foreign exchange transactions may have increased to 7%, but the dollar still accounts for a share of 88% of those transactions.
“It is very difficult to compete on the fiat front – we see the Russians doing it by forcing the use of the ruble, and they are also wary of the yuan,” said George Boubouras, veteran expert on the currency market. markets for three decades and is head of research at hedge fund K2 Asset Management in Melbourne. “In the end, investors still prefer liquid assets and in this sense, nothing can replace the dollar.”
However, the combination of moves away from the dollar presented a challenge to what then-French Finance Minister Valéry Giscard d’Estaing famously described as “exorbitant privilege.” that the United States enjoys. A term he coined in the 1960s, describing how the hegemony of the greenback protects the United States from exchange rate risk and predicts the nation’s economic strength.
And finally they could test the whole Bretton Woods model, a system that set the dollar as the leader in the monetary order, negotiated at a hotel in a dull town in New Hampshire at the end of World War II.
Homin Lee, Asia macro strategist at Lombard Odier in Hong Kong, said the latest efforts “show that the global payments and commerce platform we’ve been using for decades can begin. rift”. .
“This entire network was born out of the Bretton Woods system — the European dollar market in the 1970s and then financial deregulation and floating exchange rates in the 1980s — the foundation that we have developed so far may be starting to move in a different direction. basic meaning,” Lee said.
Valuable lesson
The end result: King Dollar may remain supreme for decades to come, but the momentum to build deals in alternative currencies shows no sign of slowing down — especially if the cards are wild. Geopolitics continues to persuade officials to go their own way.
And the US government’s willingness to use its currency in geopolitical wars could ironically undermine its ability to effectively pursue those methods in the future.
Last month, Indonesian Finance Minister Sri Mulyani Indrawati said at the Bloomberg CEO Forum on the sidelines of the G-20 meetings in Bali: “The war in Ukraine and sanctions against Russia will provide a very valuable lesson. price.
“Many countries feel they can do direct transactions – bilaterally – using their local currency, which I think is good for the world to use a balanced currency and payment system. much more equal.”
–With support from Finbarr Flynn, Shruti Srivastava, Sudhi Ranjan Sen, Adrija Chatterjee, Daniel Flatley, Nguyen Dieu Tu Uyen, Yujing Liu, Anirban Nag, Claire Jiao, Grace Sihombing, Philip J. Heijmans, Jeanette Rodrigues and Arun Devnath .
(Add a comment from the broker in the ninth paragraph)
Most read from Bloomberg Businessweek
© 2022 Bloomberg LP
