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The US is driving demand for alternatives to its dollar hegemony

The Edge Singapore
The Edge Singapore • 6 min read
The US is driving demand for alternatives to its dollar hegemony
SINGAPORE (July 15): The ongoing diplomatic crisis between the US and its longstanding “special” ally, the UK, is not doing the former’s global reputation any favours, especially with its commander-in-chief’s approach towards foreign policy and in
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SINGAPORE (July 15): The ongoing diplomatic crisis between the US and its longstanding “special” ally, the UK, is not doing the former’s global reputation any favours, especially with its commander-in-chief’s approach towards foreign policy and inveterate inability to refrain from Twitter gunslinging.

US President Donald Trump’s sanctions and protectionist pronouncements are made while secure in the influence of the US. That is in turn powered by the comparative strength of its economy and the “almighty” dollar, which lubricates much of the global financial system.

For decades, the greenback has dominated the bulk of global trade and transactions. According to the International Monetary Fund, about 62% of global currency reserves are held in US dollars, roughly another 20% in euros, 5% in yen and 4% in pound sterling. About 2% is held in renminbi. The US dollar is also still the most commonly used currency for international payments. As at May this year, the greenback was used in 40% of worldwide international payments, followed by the euro at 34.42%; the pound is at a distant 6.6%, while renminbi-denominated payments account for 1.95%.

At the same time, however, any transaction done in US dollars, or using a US bank, brings the trading parties under US jurisdiction. This has implications for a growing number of countries and even corporations that have either offended the US or have business relationships with those who have provoked it.

Just look at Huawei Technologies. Its chief financial officer Meng Wanzhou was arrested in Canada at the request of the US. She was accused of flouting US-imposed export bans to Iran. Subsequently, Huawei was placed on the US’ export blacklist, which effectively blocked business between the Chinese company and its US counterparts, as well as with companies in other countries that had products or services with a US component. Huawei may have received a reprieve earlier this month, following Trump’s meeting with Chinese President Xi Jinping at the G20 summit, but there is no telling whether that would be rescinded.

To be fair, even before Trump took office, there were various “blocs” being formed, ostensibly to challenge a US-dominated world economic order.

In 2013, China proposed the formation of the Asian Infrastructure Investment Bank, and the Beijing-headquartered organisation opened for business in January 2016. It has 70 members and 27 prospective ones; founding members include Australia, Israel, Russia and Singapore, and one of the most recent entrants was Canada.

In 2014, after being sanctioned for its role in the Ukraine crisis, and fearing the fate of Iran, which was cut off from the global financial system in 2012, Russia started developing an alternative to global financial messaging network SWIFT. It has held talks with China, India, Iran and Turkey about the use of its system, and has said it received interest from Arab countries. There is also talk of connecting the Russian system with Europe.

Meanwhile, Russia and China have been pushing their trading partners to transact in their respective currencies instead of using the US dollar. In March last year, China launched renminbi-denominated oil futures contracts on the Shanghai International Energy Exchange, with the hope that it would be embraced by international investors and become a benchmark for global oil transactions, thereby displacing the dollar as the currency of reference in international trade. The volume of transactions in these contracts has picked up significantly over the last month.

More recently, in January this year, three European allies — the UK, France and Germany — announced the formation of INSTEX, or the Instrument in Support of Trade Exchanges. The mechanism, operational this month, is designed to circumvent the US financial system and its accompanying restrictions, and allow European companies to trade with Iranian ones without any direct financial flows. The scope of INSTEX is initially confined to humanitarian goods such as medicines and food, and other European Union nations are reportedly in the process of joining INSTEX, making the system more widely used.

Separately, Saudi Arabia has repeatedly threatened to stop using US dollars for its oil trades, according to reports. If that happens, it would undermine the US dollar’s status as a global reserve currency, and consequently cut Washington’s clout in global trade and affairs.

Yet, potential contenders for the global reserve currency are still far behind. Observers say the euro, for instance, while a close second in its use in international payments, has a fundamental problem: It may be a common currency within the eurozone, but it lacks a unifying political structure required for a robust response to any crisis. Moreover, the eurozone itself faced a debt crisis not too long ago, and several member states are still weighed down by lacklustre economic activity.

Meanwhile, China has failed to use its primary expansionist tool, the Belt and Road Initiative, to compel countries to transact using the renminbi. The AIIB’s shareholding is denominated in US dollars and the bulk of the BRI-related projects is still funded using the dollar instead of the renminbi.

China watchers themselves are unconvinced that the renminbi would truly become an international currency anytime soon. For one, the central government is not expected to relax its control over the economy.

And, the US, despite several economic shocks and its ongoing trade war with China, still has a robust economy. Its GDP grew 3% y-o-y in 2018 to US$20.5 trillion ($27.8 trillion). The first quarter of 2019 also saw sustained growth, with GDP growing 3.1%.

Still, there is rising discontent with the way the US administration seems to be weaponising the dollar to the detriment of both allies and adversaries. That certainly provides an incentive for other countries to seek alternatives to US dollar hegemony.

The world in 1944 was engulfed in a war of unprecedented scale and destruction — but one with its end already in sight, largely thanks to the US’ industrial muscle. It was under such conditions that the Bretton Woods agreement was signed this month 75 years ago. Since then, the US dollar has been a reliable projection of American economic might, winning it wars and allies. Trump is now using it to make enemies and lose friends.

This story first appeared in The Edge Singapore (Issue 890, week of July 15) which is on sale now. Login to read our cover story "Currency swap" here

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