This month, Pakistan adopted a major departure from its
long-standing reliance on the US dollar for export payment.
As it utilized Chinese Yuan to pay for its inaugural
government-to-government purchase of 100,000 tonnes of Russian crude oil, which
marks the country’s first international transaction in Yuan.
Similarly, Argentina's Secretary of State for Trade, Matias
Tombolini, also revealed recently on social media that his country has settled
transactions worth a staggering $2.721 billion with China, using the Yuan as
the main instrument of transaction.
Interestingly, 19 percent of Argentina's imports were
settled in Yuan in April and May, and Tombolini asserted that this strategic
shift would fortify their foreign exchange reserves and enhance their control
over the economic landscape.
A potent blow to the US dollar
Consequently, on April 26, the Argentine government
announced the adoption of the Yuan for settling trade in Chinese-imported
goods, symbolizing a potent blow to the US dollar’s dominance.
The emergence of parallel currencies in international trade
has fuelled the on-going heated debate over de-dollarization, with recent
events providing additional ammunition to those critical of US dominance.
These two examples serve as poignant reminders of the
growing trend toward alternative currencies and the potential erosion of the US
dollar's hegemonic status.
A reduced reliance on American currency
As countries like Pakistan and Argentina embrace non-dollar
payment systems in major transactions, the allure of diversification and
reduced reliance on the American currency becomes all the more apparent.
The global financial landscape is undergoing a subtle but
significant transformation, one that challenges the long-standing supremacy of
the US dollar.
The emergence of parallel currencies in international trade has fuelled the on-going heated debate over de-dollarization, with recent events providing additional ammunition to those critical of US dominance.
Recently, in a significant development, China and Brazil
unveiled a momentous agreement to conduct trade using their domestic
currencies—the Chinese Yuan and the Brazilian Reais—effectively sidestepping
the dominant influence of the US dollar.
This move underscores this new shift in trade links between
the two economic powerhouses, with China holding the position of Brazil's
largest trading partner, as bilateral trade soared to a remarkable $150 billion
in 2022.
Furthermore, China's Renminbi has secured a prominent place
as Brazil's second-largest international reserve currency. This strategic shift
amplifies the expanding role of the Renminbi/Yuan on the global stage.
China's recent decision to maintain its imports of crude oil
and Liquefied Natural Gas (LNG) from GCC countries, while conducting trade
settlements in the Yuan, has amplified this trend.
China executed its inaugural cross-border settlement in Yuan
for LNG sourced from the UAE on March 28.
Gaining transnational and regional recognition
This trend of exploring alternative currencies to reduce
dependence on the dollar is gaining momentum, with transnational and regional
organizations like BRICS and the ASEAN actively considering such measures. The
momentum of BRICS currency is already very swift and enticing many countries to
join the club. Additionally, Brazil and Argentina have proposed the establishment
of a shared currency known as the "SUR" to bolster regional trade and
financial interactions.
These developments highlight two parallel phenomena:
erosion of US dollars’ dominance and emergence of parallel currencies,
particularly Chinese Yuan.
The dollar's dominance over the global economy has been a
topic of discussion since the collapse of the Bretton Woods system and the
introduction of the euro by the European Union in 1999.
The 2008-2009 financial crisis and its aftermath only
heightened concerns about the sustainability of its power. These fears have
manifested in a trend towards de-dollarization, which has accelerated in recent
years.
Central banks around the world held less than 59 percent of
their foreign exchange reserves in dollars in the final quarter of 2022, it
decreased from 70 percent as compared to 2000.
While the Euro's share of global reserves has only modestly
increased, from 18 percent to just under 20 percent, the Chinese Renminbi
(RMB/Yuan) has rapidly gained traction during the same period, despite
accounting for less than 3 percent of global reserve currency holdings.
Last year, in an effort to exert pressure on Russia, the US
deployed a series of punitive measures, including freezing a substantial $300
billion of Russia's foreign currency reserves and ousting major Russian banks
from SWIFT, the international interbank messaging service.
How weaponization lead to alternative financial
infrastructures
However, these actions, rightly dubbed as
"weaponization" of the dollar, inadvertently paved the way for the
rise of alternative financial infrastructures spearheaded by Russia and China.
In response, these countries have taken it upon themselves
to establish their own parallel financial systems, posing a formidable
challenge to the global dominance of the US dollar.
The year-long Ukraine-Russia conflict has had profound
repercussions, triggering significant transformations in the realms of
economics, geopolitics, and culture on a global scale.
Yet, the most notable consequence has been the push towards a multipolar world, shifting away from the concentration of economic power within a singular hegemonic force. This trend, propelling a more diverse and balanced global power structure, is gathering momentum and exhibiting no signs of abatement.
Yet, the most notable consequence has been the push towards
a multipolar world, shifting away from the concentration of economic power
within a singular hegemonic force. This trend, propelling a more diverse and
balanced global power structure, is gathering momentum and exhibiting no signs
of abatement.
The surge in the value of the dollar in recent years has
sent shockwaves across the globe, causing widespread repercussions for nations
worldwide.
Among the most significant effects is the burden it places
on countries with dollar-denominated debt, as the strengthening currency makes
repayment increasingly costly.
The fluctuations in the dollar's value have disturbed the
financial equation across the globe, with its current standing at an
astonishing 10 percent higher since the onset of the Ukraine conflict in
February 2022, and a staggering 30 percent higher than a decade ago.
This trajectory has instilled caution in smaller economies,
leading them to seek refuge in alternative currencies and fostering regional
trade alliances. Additionally, the soaring dollar has imposed a heavy toll on
countries reliant on imported essentials like fuel and food, rendering them
exorbitantly expensive.
The repercussions of this dollar dominance raise legitimate
concerns for nations grappling with mounting economic burdens. Amid mounting
concerns over the potential future use of US sanctions against them, countries
like China are taking proactive steps to distance themselves from the US
dollar, a move that analysts argue is crucial for safeguarding their economic
stability.
With China already targeted by US sanctions in sectors like
semiconductor trade, the fear of further repercussions has intensified in
Beijing.
As a result, China is actively pursuing strategies to reduce
its reliance on the dollar, a decision motivated by the imperative of
preserving the seamless functioning of its economy in the face of potential
challenges.
The ascent of China's global economic influence poses a
major challenge to the US dollar's status as the world's reserve currency,
particularly with its recent forays into Middle Eastern markets, including the
significant Saudi Arabian oil market.
This venture has the potential to shift the balance in favor
of widespread adoption of China's currency, the yuan – being touted by the
Western media as the “Yuanization.” China's substantial purchases of US
Treasury bills during the 2008 financial crisis temporarily bolstered the US
economy, but this trend has since reversed.
China's reduced holdings of US debt, falling below $1
trillion, indicate a deliberate effort to minimize exposure to the dollar,
especially in the face of escalating trade tensions.
For obvious reasons, China is more determined than ever to
free itself from its dollar dependence. Though it is too difficult to predict
when the yuan would be able to outcompete the US dollars, one thing is certain
that the process of de-dollarization is picking up speed, much faster than the
expectations of American financial managers.
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