Opinion

Dedollarisation: the end of US hegemony in global finances – Jamari Mohtar

Washington worries as countries move towards local currency deals, Let’s Talk! editor writes

Updated 10 months ago · Published on 11 May 2023 8:00AM

Dedollarisation: the end of US hegemony in global finances – Jamari Mohtar
The United States is feeling the pressure as several countries move towards making deals in local currencies. – Pixabay pic, May 11, 2023

DOLLARISATION represents US dominance in global finances. It started in the 1920s when the US dollar began to displace the pound sterling as an international reserve currency.

After the US emerged as an even stronger superpower during WWII, the Bretton Woods Agreement of 1944 established the post-war international monetary system, with the US dollar ascending to become the world’s primary reserve currency for international trade, and the only post-war currency linked to gold at US$35 per troy ounce.

The US Treasury exercises considerable oversight over the SWIFT financial transfer network, and consequently has a huge sway on the global financial transaction systems, with the ability to impose sanctions on foreign entities and individuals.

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications system and it powers most international money and security transfers.

It is a vast messaging network used by financial institutions to quickly, accurately, and securely send and receive information, such as money transfer instructions.

However, rising government spending in the 1960s led to doubts about the US’ ability to maintain this gold convertibility, and gold stocks dwindled as banks and international investors began to convert dollars to gold, resulting in the decline of the dollar.

Facing an emerging currency crisis and the imminent danger that it would no longer be able to redeem dollars for gold, this convertibility was finally terminated in 1971 by then-president Richard Nixon, culminating in the “Nixon Shock”.

This refers to a series of economic measures taken in 1971 in response to increasing inflation, the most significant of which were wage and price freezes, surcharges on imports, and the unilateral cancellation of the direct international convertibility of the US dollar to gold.

In 1971, then US president Richard Nixon terminates the covertibility of gold to dollars leading to the ‘Nixon Shock’. – AFP pic, May 11, 2023
In 1971, then US president Richard Nixon terminates the covertibility of gold to dollars leading to the ‘Nixon Shock’. – AFP pic, May 11, 2023

By 1973, the current regime based on the de facto freely floating fiat currencies replaced the Bretton Woods system.

Another related concept to the dollarisation is the petrodollar, where all international trading in oil must use the US dollar.

Conspiracy theories abound that Saddam and Gaddafi were murdered because they had the temerity to refute the petrodollar by advocating the dinar as the currency for their oil trading (petrodinar).

Hence Iraq and Libya – at the instigation of the neo-cons, they were reduced to rubbles via regime change and became failed states to this day.

But when China and Russia dared to refute the petrodollar by using the yuan (petroyuan) and the roubles (petroroubles) in their oil trading, the US was powerless to turn the yuan or roubles into rubbles.

The dollar’s ubiquitous presence in global trade, finance, and investment has endowed it with significant advantages, such as lower transaction costs, reduced exchange rate risk, and the ability to finance deficits at relatively lower costs. 

Also, its prominence has been underpinned by the size and strength of the US economy, the deep and liquid US financial markets, and the perception of the US as a bastion of stability.

Nonetheless, the US dollar has its own set of drawbacks, as it affords the US the “exorbitant privilege” to maintain large current account deficits and accumulate significant amounts of debt, which can contribute to global imbalances and economic instability.

In other words, this allows the US to spend huge amounts of money like water to become powerful and filthy rich at the expense of everyone else in the world.

Most of the money has gone and will continue to go to its military-industrial complex and funding regime change adventures.

The reckoning time for the US will come when its debt becomes so astronomical that its fate as an economic superpower will be gone soon after.

The US possesses an ‘exorbitant privilege’ to maintain large current account deficits and accumulate significant amounts of debt, allowing it to overspend, especially in the military industry. – AFP pic, May 11, 2023
The US possesses an ‘exorbitant privilege’ to maintain large current account deficits and accumulate significant amounts of debt, allowing it to overspend, especially in the military industry. – AFP pic, May 11, 2023

The dollar’s dominance also renders other economies susceptible to fluctuations in US monetary policy, often leading to spillover effects that may not align with their domestic economic conditions.

Furthermore, countries with substantial dollar-denominated debt may face heightened vulnerability to currency fluctuations and capital flow reversals, exacerbating the risk of financial crises.

These factors, combined with the growing economic power of emerging markets and their desire for a more diversified and resilient financial architecture, have spurred many countries’ interest in going ahead with dedollarisation.

In recent years, several countries and regions have embarked on the path towards dedollarisation, driven by a combination of geopolitical, economic, and strategic considerations.

Way back in 2020, Russian Foreign Minister Sergey Lavrov explained Moscow is continuing “its policy aimed at gradual dedollarisation” and is looking to make deals in local currencies where possible. 

Lavrov called the rejection of the greenback “an objective response to the unpredictability of US economic policy and the outright abuse by Washington of the dollar’s status as a world reserve currency”.

He was more forthright on April 26, when he said the US has proven they were not telling the truth for many decades after Nixon abolished the gold standard when it claimed: “Well, don’t worry. Even without being backed by gold, this isn’t our dollar. This is our shared common global currency that will ensure the functioning of all mechanisms of the global economies.”

Lavrov went on to reiterate that the trend of abandoning the use of US dollars for settlement in international trade and switching to domestic currency is irreversible.

As emerging economies, oil-producing countries in the Middle East and even Europe try to innovate cross-border payment and settlement mechanisms, sign bilateral currency agreements, and promote the diversification of foreign exchange reserves, the pace of global “dedollarisation” is accelerating, he said.

The Russian diplomat also added there is a “big question” of what will happen with the international financial system, “including the International Monetary Fund (IMF) and the World Bank”.

In late March, Malaysian Prime Minister Anwar Ibrahim weighed in on the issue by advocating the establishment of an Asian Monetary Fund (AMF) to reduce dependency on the US dollar.

The IMF, under the influence of the US and EU, seems to be too fixated on financially propping up the Kyiv regime to prolong the Ukraine war.

According to Anwar, China is open to talks with Malaysia on forming an AMF, amid the world’s growing impatience with the dominance of the US dollar. 

The Malaysian leader’s comments came just months after former officials in Singapore discussed what economies in the region should be doing to mitigate the risks of a still-strong dollar that’s weakened local currencies.

In March, Prime Minister Datuk Seri Anwar Ibrahim announces during an official visit to China a suggestion to form the Asian Monetary Fund to relieve Asian countries’ dependence on the dollar. – Bernama pic, May 11, 2023
In March, Prime Minister Datuk Seri Anwar Ibrahim announces during an official visit to China a suggestion to form the Asian Monetary Fund to relieve Asian countries’ dependence on the dollar. – Bernama pic, May 11, 2023

Some analysts are concerned that as countries reduce their reliance on the US dollar, adjustments in the composition of global reserve assets may lead to shifts in capital flows and changes in asset prices.

In the absence of adequate policy coordination and risk management, these could create financial instability, particularly in emerging markets and countries with substantial dollar-denominated debt.

Consequently, policymakers must be vigilant in monitoring these dynamics and take appropriate measures to safeguard financial stability.

US Treasury Secretary, Janet Yellen, while admitting the role of the US dollar as the world reserve currency could diminish due to Washington using its leverage over the global financial system to pursue its geopolitical goals through sanctions, she, however, insisted rather smugly there is no obvious candidate to replace it.

Yellen said this when asked during an interview on April 16 by CNN’s Fareed Zakaria about the efficiency of the anti-Russia sanctions and about Washington’s track record of what he described as the “weaponisation of the dollar”.

Yellen acknowledged that the use of financial sanctions “could undermine the hegemony of the dollar” in the long run, but promised that Washington was using this “important tool” judiciously and with the backing of its allies.

Regardless, she added, the role of the US dollar is explained by factors such as the volume of the US treasuries market, its wide use in international trade, and a “rule of law” in the US that other nations cannot offer.

US Treasury Secretary Jenet Yellen has said that the dollar’s role as the world reserve currency could diminish due to Washington's leverage over the global financial system, but there are ‘no obvious candidates’ to replace it. – AFP pic, May 11, 2023
US Treasury Secretary Jenet Yellen has said that the dollar’s role as the world reserve currency could diminish due to Washington's leverage over the global financial system, but there are ‘no obvious candidates’ to replace it. – AFP pic, May 11, 2023

“We haven’t seen any other country that has this basic infrastructure and institutional infrastructure that would enable its currency to serve the world like this,” she explained.

In this regard, she is missing the point because opponents of US domination in global finances are not necessarily advocating replacing the dollar with another currency serving the same role.

They are in fact prioritising a transition away from the dollar and into regional currencies. An absence of a single global reserve currency would be a natural element of multipolarity, supporters of such a model say.

The West’s use of unprecedented sanctions against Russia, including bans on trade, seizure of national reserves and denial of financial services to Russian companies, has merely sped up the transition, in their view.

“It’s not a coincidence that the talk about a switch to national currencies has been spurred now,” Lavrov remarked in February during a discussion on Russia-Brazil trade. “Nobody knows who the US president could find unappealing after getting up on the wrong side of the bed.” – The Vibes, May 11, 2023

Jamari Mohtar is the editor of Let’s Talk!, an e-newsletter on current affairs

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