Are world circumstances apt to jettison American dollar dominance? Since Donald Trump took over the presidency of the United States, opponents of Washington’s policies have been increasing. After Russia, Iran and North Korea were the main enemies, China and Turkey had also become at the top of the list of Washington’s trade war.
Under the policy of economic sanctions imposed by the US administration on these countries, using American currency, the aforementioned states are now looking for a real response to Washington’s procedures in order to reduce the dominance of the US dollar globally. Can these countries undermine the dollar, and can these initiatives lead the global economy to depeg their economies from American dollar?
This is the first time ever that the world economies witness such a dominance of one currency over others as the American dollar controls almost all of the world’s commercial and financial transactions. Most commodities are priced in dollars, primarily oil and financial stocks.
The American currency accounts for about 85 percent of commodities and services traded worldwide. More than 60 percent of world currency reserves are dollar based. Thus, any revamp in the major world currency would lead to a global economic tremor as the current trend of funds around the world directly depends on dollar value.
Investments are moving in consistent with US dollar and the global economies center around American economy thereof, for how long will this last? The dollar has been the undisputed acknowledged master of international currencies since the end of World War II.
When the then President Richard Nixon decided in 1971 to prevent the conversion of the US dollar to gold, declaring the collapse of the Bretton Woods Agreement, which has been a landmark system for monetary and exchange rate management that was established in 1944, the dollar has since then become the world’s first “benchmark currency”. Other currencies have been affected by the rise or fall of the dollar.
The dollar’s current exchange rate does not reflect its true value, which reinforces the idea that the US currency can easily lose its value easilyShehab Al-Makahleh
Since 1971, many investors view the dollar as a safe haven for gold, and may even outperform it as interest rates rise. This has been clear in the past 8 months of 2018. As gold is compared to dollar, the US currency derives much of its strength from this outlook that allows huge financial flows into US economy.
However, the dollar’s current exchange rate does not reflect its true value, which reinforces the idea that the US currency is fragile and can easily lose its value easily. According to an IMF report at the end of July 2017, the value of the dollar is overpriced by up to 20 per cent, based on fundamentals of the US economy.
It is important here to clarify the idea that the decline in the dollar exchange rate does not mean the decline of control because domination relies on the use formula of the currency in commercial transactions or international reserves and financial loans. Thus, it is possible the dollar exchange rate would decline any time without affecting its dominance globally. In other words, the weakness of exchange rates does not affect US hegemony.
In the past, economists believed that the dollar’s control over financial transactions in the world is almost absolute; this has changed since Trump has taken over US presidency. The number of those who reject American control, which is affecting the economies of many countries, has been increasing through the sharp drop in domestic currencies and high levels of inflation in these countries accordingly.
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Russia, Turkey and Iran seek exchange in local currencies. Russia, Turkey and Iran have recently faced economic sanctions imposed by the US administration, which has had a direct negative impact on the economies of these countries, prompting them to seek trade in local currencies.
On August 11, 2018, Turkish President Recep Tayyip Erdogan said that his country is currently preparing to use local currency in trade exchanges with China, Russia, Iran, Ukraine and other countries, adding that Turkey is ready to establish the same system with Europe if Ankara seeks a way out of the American dollar grip and dominance.
Russian Foreign Minister Sergei Lavrov has earlier confirmed that Russia supported the use of local currencies instead of US dollar in his country’s trade transactions with other countries including Turkey, stressing that the role of the dollar as an international reserve currency would recede and disappear over time.
China’s way to block the dollar
China’s intervention of the yuan in international Petro-Yuan is also a key step that would aggravate dollar’s dominance, a move that could lead to huge changes in the global oil game, which could erode the dollar’s supremacy.
On March 26th, 2018, China began trading crude oil contracts denominated in Chinese currency on the Shanghai International Energy Exchange. The Chinese move is a direct challenge to the dollar-dominated pricing plan in crude oil markets in a bid to weaken the dollar as an international reserve currency.
Countries use the dollar to buy oil, but are there factors that could make this change? This depends on the extent of demand based on Petro-Yuan formula. There is no doubt that countries suffering from a crisis with the dollar will go for this option. In the past, any country that seeks to buy oil must first get US dollars.
This has been creating a huge demand for this currency at international markets, crafting global confidence in the dollar. However, China has made this step a new alternative, access to dollar is no longer a term now to buy oil. The lower the demand on US dollar, the lower its exchange price would be at international trade exchanges.
Moreover, China is the world’s largest oil importer, making it possible to choose the countries that approve the Petro- Yuan deal with oil sellers, especially when oil prices are relatively low, and sellers have to export more of this commodity without losing their reserves of US dollars.
However, this is not that simple and requires much time, especially since the world’s largest oil exporters agreed to accept the US dollar exclusively for oil sales more than 4 decades ago. In this regard, it is difficult to find swift fallouts, especially with American crude oil production increasing to its highest levels ever. Nonetheless, collective movement is what will undermine much of the American dollar dominance, which in turn affects American political and military influence overseas.
Shehab Al-Makahleh is Director of Geostrategic Media Center, senior media and political analyst in the Middle East, adviser to many international consultancies. He can be reached at: @shehabmakahleh and @Geostrat_ME.