SINGAPORE – King Dollar is facing a revolt.
Tired of a too-strong and newly weaponised greenback, some of the world’s biggest economies are exploring ways to circumvent the United States currency.
Smaller nations, including at least a dozen in Asia, are also experimenting with de-dollarisation.
In addition, corporates around the world are selling an unprecedented portion of their debt in local currencies, wary of further US dollar strength.
No one is saying the greenback will be dethroned any time soon from its reign as the principal medium of exchange.
But not too long ago, it was almost unthinkable for countries to explore payment mechanisms that bypassed the US currency or the Swift network that underpins the global financial system.
Now, the sheer strength of the dollar, its use under President Joe Biden to enforce sanctions on Russia in 2022 and new technological innovations are together encouraging nations to start chipping away at its hegemony.
“The Biden administration made an error in weaponising the US dollar and the global payment system,” Mr John Mauldin, an investment strategist and president of Millennium Wave Advisors, wrote in a newsletter last week.
“That will force non-US investors and nations to diversify their holdings outside the traditional safe haven of the US.”
Plans already under way in Russia and China to promote their currencies for international payments, including through the use of blockchain technologies, accelerated rapidly after Russia’s invasion of Ukraine. Moscow, for example, began seeking remuneration for energy supplies in roubles.
Soon, the likes of Bangladesh, Kazakhstan and Laos were also stepping up negotiations with China to boost their use of the renminbi. India began talking up more loudly the internationalisation of the rupee and, just this month, started securing a bilateral payment mechanism with the United Arab Emirates (UAE).
Critical to those considerations was the move by the US and Europe to cut off Russia from the Swift global financial messaging system.
The action, described as a “financial nuclear weapon” by the French, left most major Russian banks estranged from a network that facilitates tens of millions of transactions every day, forcing them to lean on their own, much smaller version instead.
This had two implications. First, the US sanctions on Russia stoked concern that the dollar could more permanently become an overt political tool – a concern shared especially by China, but also beyond Beijing and Moscow. India, for example, has been developing its own home-grown payment system that will partly mimic Swift.
Second, the US decision to use the currency as part of a more aggressive form of economic statecraft puts extra pressure on economies in Asia to choose sides. Without any alternative payment system, they would run the risk of being compelled into compliance with, or enforcement of, sanctions that they may not agree with – and losing out on trade with key partners.
“The complicating factor in this cycle is the wave of sanctions and seizures on USD holdings,” said Mr Taimur Baig, managing director and chief economist at DBS Group Research in Singapore. “Given this backdrop, regional steps to reduce USD reliance are unsurprising.”
It is not just the sanctions that are helping to accelerate the de-dollarisation trend. The US currency’s rampant gains have also made Asian officials more aggressive in their attempts at diversification.
The dollar has strengthened about 7 per cent in 2022, on track for its biggest annual advance since 2015, according to a Bloomberg index of the dollar. The gauge reached a record high in September as dollar appreciation sent everything from the British pound to the Indian rupee to historic lows.
The dollar’s strength is a huge headache for Asian nations who have seen prices of food purchases soar, debt-repayment burdens worsen and poverty deepen.
Sri Lanka is a case in point, defaulting on its dollar debt for the first time ever as a soaring greenback crippled the nation’s ability to pay up. Vietnamese officials at one point blamed dollar appreciation for fuel supply struggles.
Hence, moves such as India’s deal with the UAE, which accelerates a long-running campaign to transact more in the rupee and to set up trade settlement agreements that bypass the US currency.
Meanwhile, dollar-denominated bond sales by non-financial companies have dropped to a record-low 37 per cent of the global total in 2022. They have accounted for more than 50 per cent of debt sold in any one year on several occasions in the past decade.
While all these measures may have a limited market impact in the short term, the end result may be an eventual weakening of demand for the dollar. The Canadian dollar’s and Chinese renminbi’s share of all currency trades, for instance, are already slowly edging higher.
Technological progress is another factor facilitating efforts at moving away from the greenback.
Several economies are chipping away at dollar use as a by-product of efforts to build new payment networks – a campaign that pre-dates the surging greenback.
Malaysia, Indonesia, Singapore and Thailand have set up systems for transactions between one another in their local currencies rather than the US dollar. Taiwanese can pay with a QR code system that is linked with Japan.
All in, the efforts are driving momentum further away from a West-led system that has been the bedrock for global finance for more than half a century.
What is emerging is a three-tier structure with the dollar still very much on top, but increasing bilateral payment routes and alternative spheres, such as the renminbi, that seek to seize on any potential US overreach.
For all the agitation and action afoot, it is unlikely the dollar’s dominant position will be challenged any time soon. The strength and size of the US economy remain unchallenged, Treasuries are still one of the safest ways to store capital and the dollar makes up the lion’s share of foreign-exchange reserves.
The renminbi’s share of all foreign-exchange trades, for example, may have climbed to 7 per cent, but the dollar still makes up one side of 88 per cent of such transactions.
Nevertheless, the combination of moves away from the dollar are a challenge to what then French Finance Minister Valery Giscard d’Estaing famously described as the “exorbitant privilege” enjoyed by the US.
The term, which he coined in the 1960s, describes how the greenback’s hegemony shields the US from exchange rate risk and projects the nation’s economic might.
And they may ultimately test the entire Bretton Woods model, a system that established the dollar as a leader in the monetary order, which was negotiated at a hotel in a sleepy New Hampshire town at the close of World War II.
The net result: King Dollar may still reign supreme for decades to come, but the building momentum for transactions in alternate currencies shows no sign of slowing – particularly if geopolitical wild cards continue to convince officials to go their own way.
The US government’s willingness to use its currency in geopolitical fights could ironically weaken its ability to pursue such methods as effectively in future.
“The war in Ukraine and the sanctions on Russia will provide a very valuable lesson,” Indonesian Finance Minister Sri Mulyani Indrawati said in November at the Bloomberg CEO Forum on the sidelines of the Group of 20 meetings in Bali.
“Many countries feel they can do transactions directly – bilaterally – using their local currencies, which I think is good for the world to have a much more balanced use of currencies and payment systems.” BLOOMBERG