Financial Times: Dollar will lose status as main reserve currency

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The US dollar’s hegemony in the global economy seems to be coming to an end. More and more countries want to invest their foreign exchange reserves in other currencies and trade without dollars. An analysis by Alexander Men.

An analysis by Alexander Men

In view of the global upheavals, the period of the hegemony of the US dollar in the global economy seems to be slowly but surely coming to an end. Because the US currency, which is still widely used in today’s international payments as a transaction and reserve currency, is now being questioned in many parts of the world. More and more countries want to invest their foreign exchange reserves in other currencies in the future and no longer want to conduct their trade relationships (only) using the dollar.

China and Saudi Arabia agree oil trade in yuan

China and Saudi Arabia agree oil trade in yuan

The BRICS countries – Brazil, Russia, India, China and South Africa – which together make up almost 40 percent of the world’s population and 25 percent of global gross domestic product, have been working for years to establish a common currency, using the dollar as the lead – and replace reserve currency.

This trend is now also evident in South America, where the continent’s two largest countries – Brazil and Argentina – are officially calling for the world economy to accelerate its move away from the dollar and euro. At a meeting last January between Brazilian President Luiz Inácio Lula da Silva and his Argentinian counterpart Alberto Fernández, the possibility of creating a common South American currency, to be called the “Sur” (Spanish for “South”), was discussed, among other things.

China’s policy shows that the dollar is losing more and more ground, especially in the most populous part of the world, Asia. The Chinese leadership is promoting the internationalization of its own national currency – the yuan – and has therefore already launched a large number of bilateral transactions that were not settled in dollars. An example of this is Beijing’s initiative to bill future purchases of fossil fuels from Arab monarchies such as Saudi Arabia in yuan. A wise move given that dollar-denominated commodity trading is a cornerstone of dollar dominance in the global financial sector. So if you want to replace the dollar, then you should avoid trading commodities. And this is exactly the path the Chinese have obviously taken with their attempt to introduce the “petro-yuan”.

De-dollarization will continue

With regard to the Chinese approach and the current world situation, the Financial Times (FT) recently reported that sooner or later the dollar will feel the effects of the increasing geopolitical rivalry between East and West. In which FTIn the article “A bipolar currency regime will replace the dollar’s exorbitant privilege”, the renowned US economist Nouriel Roubini argues that the dollar will lose its status as the world’s most important reserve currency in the next ten years.

Economist: With this simple step, Russia could make a significant advance in de-dollarization

Economist: With this simple step, Russia could make a significant advance in de-dollarization

Contrary to the claims of numerous financial experts that the yuan cannot become a real reserve currency and that “nothing” cannot replace the dollar, Roubini believes that the increasingly fierce geopolitical competition between Washington and Beijing will inevitably also affect the global construct of reserve currencies. According to the economist, the current system of international transactions and foreign exchange will probably be replaced by a bipolar currency system in a world that is increasingly divided into two spheres of influence between the USA and China.

In this sense, he argues that China and Russia have significantly strengthened their positions on the world market. Evidence of this are the most recent commercial transactions between the two countries, which are settled in their national currencies.

There is also the aspect that the traditional US partners in the Persian Gulf, above all Saudi Arabia, should increasingly do without the dollar in their trade relations with the Chinese. In this regard, Roubini said it is not far-fetched to think that Beijing could offer the countries of the Arabian Peninsula the opportunity to invest more of their foreign exchange reserves in yuan.

According to him, both the Gulf States and other emerging economies are likely to accept such an offer from China because they trade far more with the country than they do with the US. In addition, the current system makes emerging markets financially and economically very vulnerable to changes in US monetary policy stance driven by US domestic factors such as inflation.

According to Roubini, another threat to the dominance of the dollar is also the new digital currencies. New payment systems such as WeChat Pay or Alipay are being developed as alternatives to SWIFT and should accelerate the emergence of a bipolar global monetary and financial system.

more on the subject – Global South: Commodity-backed currencies to replace US dollars

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