What is driving the dedollarization trend?

What is driving the dedollarization trend?

By Kostas Raptis

“Every day I ask myself: why do all countries trade through the dollar? Why don’t we do it with our own currencies? Who decided that after abandoning the gold standard, the international currency should be the dollar and not the yuan, the real or the peso? Brazilian President Lula da Silva asked rhetorically during his recent visit to the headquarters (under the leadership of his predecessor, Dilma Rousseff) of the BRICS New Development Bank in Shanghai.

This is not a recent or passing obsession. In an interview he gave in 2019, while he was still in prison, Lula confided that the reason why the BRICS group was created (during his first term as president) was “to create our own currency and become independent of the dollar”.

And while that sounds like cheap rhetoric, there’s always the reality of actionable movement.

Brazil has signed an agreement with China to boost bilateral trade in national currencies. The ASEAN (Association of Southeast Asian Nations) countries discussed at length at their meeting last month at the level of finance ministers and central bankers about reducing their dependence on dollar, euro, yen and pound sterling, in the sense of adopting cash transactions in local currencies and using local payment systems.

At the beginning of April, it was learned that India and Malaysia had adopted the settlement of transactions between them in Indian rupees. During a recent visit to China, Malaysian Prime Minister Anwar Ibrahim reportedly proposed the creation of an “Asian Monetary Fund” to reduce dependence on the dollar.

Similarly, a meeting of delegations from the Bangladeshi and Russian finance ministries agreed to pay for the Rooppur nuclear power plant project in yuan to circumvent the Russian blockade of the dollar-operated SWIFT system. Reimbursement will be made through a Chinese bank, using the Chinese CIPS interbank system, which it presents as an alternative to the SWIFT system.

Even traditional US allies like Saudi Arabia (a pillar of the “petrodollar” system) have their doubts, judging by Riyadh’s willingness to experiment with conducting some of its oil trade with the China to petroyuan.

In addition, in March, the Shanghai Oil and Natural Gas Exchange carried out the first purchase and sale of LNG, originating in the United Arab Emirates, in yuan, with the French company Total as intermediary.

The dollar represents 58% of international foreign exchange reserves, more than double the euro in second place. The emergence of a single competitor capable of “dethroning” it seems an outlandish proposition.

That doesn’t mean, however, that players aren’t increasingly looking to diversify their options lately. The two powers that hold the most US Treasuries, China and Japan, last year cut their relative exposure by $400 billion, or half of the US defense budget. China’s share, in particular, is at its lowest level in 12 years (849 billion Treasuries).

On the other hand, gold is becoming more and more attractive. In January, the World Gold Council announced that in 2022, demand for gold from central banks around the world had reached its highest level since 1950. China, Russia and other emerging economies are the main buyers, while the digital yuan launched by the Chinese central bank builds infrastructure for future acceleration of dedollarization.

There are long-term objective processes behind this trend. China is the largest importer of goods and the largest trading partner of 120 countries: for 61 of them, the first position is both for imports and exports, while for the United States it is the same with only 30 countries.

On the other hand, the over-indebtedness of the USA is a factor which, insofar as it is pushed out of the thinking of traders, can only appear more and more on the deep “radar”. reached $32 trillion and is expected to reach $44 trillion by 2027. Public debt has risen from 60% of GDP to 130% over the past twenty years and is expected to reach 150% by 2027. And there is none evil who are in possession of an increasingly reduced offer to finance it insofar as this translates into civil-military aggression against them.

Because the main reason why the philology of de-dollarization is gaining ground is above all (geo)political. Turning the American privilege to issue international currencies into a lobbying and projection weapon of a foreign jurisdiction encourages American competitors to consider alternatives that would not be their immediate priority. In an environment where a tenth of the countries are under American sanctions and where any third party is forced (for fear of secondary sanctions) to avoid doing business with powers that are not hostile to it, the unease can only intensify. By doing too much, the United States is precipitating exactly what it is trying to prevent: the challenge to its monetary hegemony.

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