For the longest time the status of dollar as the world reserve currency was abused to the point when it seemed that it became indispensable. National governments, central banks, and global financial markets have depended on the dollar for everything, from its status as a safe-haven asset to its use in worldwide transactions.
However, there’s an end to everything, and it might be the time to bid farewell to the dollar. In one of its articles the Wall Street Journal would point out that the emergence of the truly multipolar world means that sooner or later the dollar will be dethroned.
The latest reports coming from the IMF on the reserves held by central banks demonstrate a shift away from the dollar, as analysts point out that a rethink of the political risks embedded into US assets may be long overdue. According to the chief international strategist at Deutsche Bank in New York, Alan Ruski central banks are chipping away at the dollar’s exorbitant privilege, due to the rapid change of the existing geopolitical landscape.
In turn, Goldman Sachs analysts would point out that dollar reserves slipped by 4% over a two year period. At the same time, reserve managers carry adding renminbi and Japanese yen holdings to their portfolios, especially in countries that have had tense political relationships with the US lately.
Recently, the share of dollars held in global reserves has tumbled from 65.3% in the fourth quarter of 2016 to 61.7%. Meanwhile, the shares of allocated reserves are becoming more diversified as the euro, yuan, and yen have attained a greater representation in global reserves.
In recent years, a rapidly expanding number of countries started implementing policies that led to dedollarization of their economies. An abrupt drop in the share of dollar held in the national reserves of leading international players and their commitment to the use of national currencies in their transactions have become a new norm. To a large extent, this trend was created by Washington itself, that chose sanctions as the primary tool of its foreign policy. When so-called trade restrictions are imposed arbitrarily, impulsively and recklessly, it’s no wonder that most international players would rapidly become concerned. However, Washington carries on ignoring the long-term consequences that such policies may produce, subjecting even its most trusted economic partners to the so-called trade restrictions. Under these circumstances, some analysts point out, it seems abnormal that the United States remain in control of the world’s reserve currency, especially in a situation when its positions were already crumbling against the backdrop of the emerging multipolar order.
At one point in time, Europe decided that it needed to join its efforts if it was to confront the United States that launched an aggressive expansion in the aftermath of WWII. The first agreements detailing the course of European integration were signed back in the 1950s. However, it took Europe decades to establish a single political and economic space with a common market and a single currency. In 2000, the euro became the primary currency of a total of eleven EU states.
This resulted in Asian countries evaluating their ability to recreate this process, starting with the creation of a common currency to bypass dollar in mutual trade. Step by step, this may result in those players seeking closer association as was the case with the EU. Similarly, a single currency can allow Asian states to dodge a major financial crisis, like the one that shook the world in 1997-1998.
In a number of Asian countries, such as Malaysia, an exclusive Asian currency has been already implemented, it’s the so-called. AKU. It’s true that it does not have a physical representation and is only used only for settlements between governments, but it exists nevertheless. Last year, Malasia’s Prime Minister Mahathir Mohamad announced that the existing exchange rules make Asian currencies susceptible to external manipulations, and if Asian countries want to do something about it, they should start by creating a common trading currency based on the gold standard, due to the fact that gold remains a stable commodity. This currency will not be used in internal payments, but may be reserved for trade operations between countries. Ultimately, such a monetary arrangement can both undermine the dominance of the dollar in international trade and change the structure of national reserves of a number of international players. We must not forget that it is the ASEAN +3 countries (China, Japan and South Korea) that hold the lion’s share of gold and currency reserves of the world. Thus, a single Asian currency could in theory become the new standard of international transactions, rendering the dollar irrelevant.
With the US using the dollar as a weapon in a bid to put pressure on its trading partners, Russia, China and India are hard at work developing an agreement that could allow them bypass the dollar and trade in their national currencies. Iranian President Hassan Rouhani called on the international community to abandon the dollar in trade settlements, speaking last December at an Islamic conference in Malaysia. The position of the Iranian leader was supported by Tayyip Erdogan, who stressed that he himself has been the supporter of this idea for the longest time. It should be pointed out that in November 2018, at the 34th meeting of the Standing Committee on Trade and Economic Cooperation of the Organization of Islamic Cooperation, Turkey’s President pointed out that the use of national currencies in trade settlements is pivotal for undermining the imperialistic designs of the US.
While commenting on Vladimir Putin’s experiment of doing away with the dollar, Bloomberg pointed out that diversifying away from the US dollar costs Russia about 7.7 billion dollars in potential returns. In one of its surveys, the same media source states that the ruble is set to top the pack again in 2020, offering a safe haven amid concerns over the trade war between the US and China, according 57 global investors, strategists and traders.
Vladimir Platov, an expert on the Middle East, exclusively for the online magazine “New Eastern Outlook”.
