Challenging the dollar hegemony – prospects and pressures

Dr. Mohamed A. Ramady
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The daily news of new US sanctions and trade disputes with allies and foes alike have been a wake up call for many countries to seriously consider alternatives to a dollar denominated transactional world.

Whether this will turn out to be realistic or merely wishful thinking to those whose sovereign pride and national decision-making has been emasculated is still far from certain, but the seeds have been planted that the current dollar hegemony might be challenged in the future with all that it entails.


Until a few decades ago, any idea of straying away from the petrodollar was seen as a direct threat to American global hegemony, requiring of a military response and one of the causes of the US invasion of Iraq was that Saddam Hussein had decided to move away from the US dollar as a currency for Iraqi oil exports and instead linked it to the Euro, making other oil producers like Venezuela and Iran to mull the same.

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The invasion put a stop to that but the issue has not gone away and today given a knock in US credibility as a reliable long term trading and military partner even with long term alliances like NATO, a general rethinking from a dollar-based system is taking place in many countries.

In recent years, it has become clear to many nations opposing Washington that the only way to try and assert any semblance of national sovereignty is to progressively abandon the dollar. This serves to limit Washington’s capacity for military spending by creating the necessary alternative tools in the financial and economic realms that will eliminate Washington’s dominance.

The number of countries that are beginning to see the benefits of a decentralized system, as opposed to the US dollar system, is increasing, with some countries trying to by pass the dollar payment system

Dr. Mohamed Ramady

Prioritizing de-dollarization

As such, de-dollarization for Beijing, Moscow and Tehran has become a strategic priority, but it becomes more of a problem when leading European Union politicians like the EU President Junkers are also voicing the same opinion as they have seen the extra-territorial reach of the US financial system when they are desperately and fruitlessly trying to ensure that the Iran nuclear accord can be put on a life support system without the use of the US dollar.

For all these countries, eliminating the unlimited spending capacity of the US Central Bank in printing dollars means limiting US political reach and diminishing global destabilization. Since printing paper money is nothing short of counterfeiting, the issuer of the international currency must always be the country with the military might to guarantee control over the system.

This magnificent scheme seems the perfect system for obtaining perpetual wealth for the country that issues the de facto world currency and today, whether allies or foes like it or not, the US reigns supreme in military hegemony. In the short run, the issuer of a fiat reserve currency like the US dollar can accrue great economic benefits but in a paradoxical way in the long run, it also poses a threat to the country issuing the world currency.

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As long as foreign countries take dollars in return for real goods, the US benefits and this benefit is sometimes fails to be recognized by those in the US political system who are bashing trade surplus countries like China and threatening them with tariffs.

The reason becomes obvious as this imbalance leads to a loss of American manufacturing jobs to overseas markets, and the USA then becomes more dependent on others and less self-sufficient. Foreign countries accumulate dollars due to their high savings rates, and loan them back to the US at low interest rates to finance American excessive consumption.

This is where the actions of the US Federal Reserve and politicians becomes important – to raise US interest rates and tempt international savers to remain in dollar savings or to raise the slogan of “America First” and bring back manufacturing to the US and cause those with dollar holdings to diversify into other currencies, if they can? By all accounts the use of the dollar is increasing.

Foreign reserves

In Q1 2018, total global foreign exchange reserves, including all currencies, rose 6.3 percent year-over-year, or by $878 billion, to $11.59 trillion, within the upper range of the past three years (from $10.7 trillion in Q4 2016 to $11.8 trillion in Q3, 2014). US-dollar-denominated assets among foreign exchange reserves continued to dominate in Q1 at $6.5 trillion, or 62.5 percent of “allocated” reserves.

The deep pool of relatively liquid assets denominated in dollars, from the multi-trillion dollar pool of US government securities to the securities of many large corporations, and perceived stability of the currency have given sovereign investors and countries engaged in international trade a large incentive to keep their currency reserves in dollars, as there are few current alternatives.

The use of the international clearing system, whether a US based dollar or a Euro currency based system are important mechanisms for world trade. By accelerating this process through their removal of Iran from the SWIFT system (paving the way for the Chinese alternative, known as CIPS or Cross Border Interbank Payment System) and imposing sanctions on countries like Russia, Iran and Venezuela, has sent alarm bells.

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It is no secret that Beijing and Moscow are aiming for a gold-backed currency if and when the dollar should collapse and the Chinese have been active in promoting trade using a convertible Yuan , with conversion being into gold , a temptation offered to oil exporters so that that oil exporters are able to convert Yuan into gold immediately thanks to the Shanghai International Energy Exchange. This has pushed countries to start operating in a non-dollar environment and through alternative financial systems.

This oil- gold – Yuan mechanism signals a revolutionary economic change through the progressive abandonment of the dollar in trade but it is still early days given the huge volume of oil traded daily in the world.

Beijing however has started putting strong pressure on Gulf and other oil producers to start accepting Yuan payments for oil instead of dollars, as are other countries such as the Russian Federation.

Gulf and China

This might be tempting in order to expand the Gulf’s energy market share in China and reduce Chinese imports from Iran but it puts the Gulf countries in a delicate situation, dedicated as they are to keeping the US dollar tied to oil and their national currencies pegged to the dollar.

For China, Iran and Russia, as well as other countries, de-dollarization has become a pressing issue. The number of countries that are beginning to see the benefits of a decentralized system, as opposed to the US dollar system, is increasing, with some countries trying to by pass the dollar payment system altogether through barter trade or payment in national currencies.

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Iran and India as well as Iran and Russia have often traded hydrocarbons in exchange for primary goods, thereby bypassing American sanctions. Venezuela (with the largest oil reserves in the world) started a move to completely renounce selling oil in dollars, and has announced that it will start receiving money in a basket of currencies without US dollars.

A hundred years ago it was called “dollar diplomacy.” After World War Two, and especially after the fall of the Soviet Union in 1989, that policy evolved into “dollar hegemony.” But after all these many years of great success, is the dollar dominance coming to an end?

The artificial demand for the dollar, along with US military might, places the USA in the unique position to “rule” the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can’t last.
Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia and co author of ‘OPEC in a Post-Shale world – where to next ?’. His latest book is on ‘Saudi Aramco 2030: Post IPO challenges’.

Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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