Russian President Vladimir Putin is acting on a pledge to shrink the role of the U.S. dollar in international trade. Jean-Claude Juncker, outgoing president of the European Commission, says it’s “absurd” that Europe uses the greenback for 80% of energy imports. Chinese President Xi Jinping has railed against economic “hegemonism.” Can the mighty dollar retain its global dominance when attacked from so many sides? Don’t count it out yet.
1. Why are some people fed up with the dollar?
Because it’s so prevalent. The U.S. currency is on one side of almost 90% of foreign-exchange transactions and accounts for two-thirds of international debt. Almost all international trades in oil are priced in dollars, hence the term petrodollars. That ubiquity makes nations beholden to fluctuations in its value and ties their economies to decisions made in Washington. As Juncker intimated, it makes sense for European countries to pay for their energy needs in euros rather than dollars. Then there are the countries that get on the wrong side of American policy.
2. What’s the issue there?
Sanctions. U.S. leverage rests with the central role its banks, and the dollar, play in the global economy; any country, company or bank that violates sanctions could see their U.S.-based assets blocked or lose the ability to move money to or through accounts held in the U.S. A spate of such penalties has pushed Russia to target faster “de-dollarization.” And European leaders began work on a payments system that would enable their companies to do business with Iran without getting snagged, though progress has been slow.
3. Is dollar concern a new thing?
The U.S. currency has dominated since the end of World War II, when world leaders met at Bretton Woods, New Hampshire, to establish a system to manage foreign exchange and agreed to link their currencies to the dollar. The push to dial back the greenback has its origins partly in the 1998 currency crisis, when Asian nations got caught borrowing too many dollars and were plunged into recession as their currencies plummeted and debt repayments soared. Fast forward a decade, and Asia’s amassing of dollars to build currency reserves helped fuel a U.S. credit binge that triggered the global financial crisis. Back in 2010, Brazil, Russia, India and China set up the BRIC partnership with the aim of establishing a new world order. More recently, China has put its weight behind developing a “Belt and Road” trade route across Asia and Europe lined with infrastructure projects financed in local currencies. Those efforts accelerated after the U.S. instigated a trade war.
4. Is the dollar’s market share shrinking?
No. The Bank for International Settlements’ triennial survey showed the share of currency trades in dollars had increased marginally since 2016 to 88%. The euro’s share climbed a percentage point to 32% in 2019. Emerging-market currencies gained 3.5 points to 24.5%, mostly at the expense of the yen, while China’s yuan accounted for 4%, the same as in 2016. The share of foreign reserves held in dollars (about 62%) has remained steady over the past decade, while the dollar’s usage in global payments tracked by financial institutions has actually risen since the start of the decade.
5. Why is it so hard to get rid of the dollar?
Too much bother. Shifting to the euro, yuan or ruble means higher costs and difficulties finding banks to handle business. The euro’s allure as currency to back trade and investment has hardly been boosted by the region’s 2010 sovereign debt crisis and the European Central Bank’s use of negative interest rates. Volatility and scant volumes in emerging currencies make for higher trading and hedging costs. Russia’s first year of diversifying away from the dollar illustrated another peril: In a strong period for the dollar, the country missed out on $7.7 billion in potential returns on its foreign exchange reserves.
6. Can any currency compete with the dollar?
The euro is the only currency anywhere close. That was the conclusion of a European Commission report on strengthening the international role of the currency in June 2019. Rifts with U.S. President Donald Trump over trade tariffs as well as the sanctions on Iran have pushed the EU to seek greater financial independence. The report also found potential for boosting the share of commodities transactions in euros. With so many national governments to appease, though, progress on big European projects like this tends to be slow-moving. Bank of England Governor Mark Carney says it would be a mistake to switch one dominant currency for another; he advocates a global digital currency to supersede the dollar.
7. Why is Russia pressing ahead?
“We aren’t ditching the dollar, the dollar is ditching us,” is how Putin put it in 2018. Successive rounds of U.S. sanctions over Ukraine and alleged election-meddling in the U.S., and the threat of more to come, have given Russia good reason to try to move as much of its economy as possible out of the reach of Washington. Last year the central bank sold $100 billion in dollars from its reserves and spread the money between euro and yuan. A campaign to get companies to switch contracts to local currencies appears to be working. The euro is on course to overtake the dollar in Russia’s trade with the EU and China.
8. Is China on board?
China’s drive to make the yuan a more widely used global currency reached its pinnacle in 2015, when the International Monetary Fund decided to make it the fifth currency in its prestigious special drawing rights currency basket — a kind of overdraft account it holds for global central banks. Yet the People’s Bank of China’s focus has shifted during a six-year weakening of the yuan to keeping a tighter rein on capital outflows and trading. Bond sales raising currency outside the mainland — so-called offshore yuan — have flagged. Offshore yuan deposits are down 33% from their 2015 high. On the other hand, China has been on a mission to open domestic exchanges that are priced in yuan for commodities such as oil and iron ore.
9. Is anyone actively challenging the dollar?
Putin said in a meeting with Xi in June that using the dollar as an instrument of pressure was “undermining its role as a global reserve currency.” (A reserve currency is one that’s held by others in significant quantities as part of their foreign-exchange reserves.) Xi, with an eye on trade talks with the U.S. that involve a currency pact, obliquely described “hegemonism” as a global challenge. But watch closely for what China is doing. The focus has shifted from turning the yuan into a freely convertible currency, without government restrictions, to nurturing real economic activity through loans for its Belt and Road initiative. And keep an eye on Russia settling energy deals in euros and defense contracts in rupees. The dollar may be winning the war on the trading floors of London, New York and Tokyo, but it is losing peripheral skirmishes engineered in Moscow, Delhi and Beijing.
The Reference Shelf
- Putin leads the charge to shrink the role of the dollar.
- The BIS survey underlines the dollar’s ubiquity.
- Bloomberg Economics details how China’s shifting priorities for the yuan slowed internationalization.
- A Brussels think-tank explains Russia and the EU’s common ground on the dollar.
- Bloomberg’s “Functions for the Markets” shows how to track progress in yuan internationalization.