Is the the USD doomed as a world reserve currency?
The United States has benefited enormously from being the World’s Reserve Currency because much of the world still uses the dollar for international trade. This is because foreign governments must hold USD in their foreign exchange reserves to settle international claims and intervene in foreign exchange markets.
In addition, many emerging market countries like Argentina, Chile, Uruguay, Paraguay and Peru use USD dollars for capital goods. ie housing, commercial property, imported cars, commodities etc
U.S. dollar-denominated assets comprised 63.79 per cent of disclosed foreign exchange reserves. The Bank for International Settlements (BIS) reported that 88 per cent of all foreign exchange transactions 2016 involved the U.S. dollar on one side. In 2014, 51.9 per cent of international trade by value and 49.4 per cent of global trade by volume of transactions were invoiced in U.S. dollars. Major internationally traded commodities such as oil are still priced in U.S. dollars. The status of the U.S. dollar as the world’s reserve currency and the resulting foreign demand for U.S. dollars created what French Finance Minister Valéry Giscard d’Estaing described in 1965 as an “exorbitant privilege” for the United States. …While difficult to measure, empirical studies suggest the privilege is worth about ½ per cent of U.S. GDP (or roughly $100 billion) in an average year.
However, nations are beginning to reject the dollar because they no longer want to acquiesce to the extraterritorial imposition of U.S. laws irrelevant to their countries or trading relationships. They are irritated by FATCA and other aspects of extraterritorial taxation the US attempts to impose on them. The pointless imposition of “know your customer” rules and other anti-money laundering policies that impose high costs without impacting actual criminal behaviour is becoming a burden to everyday commerce.
Of course, when you dig a bit deeper into where and who is behind the money laundering laws, you see the countries and companies involved are somewhat opaque. The policing of money laundering is often used as an instrument of power by those involved. ie the UK’s British territories and the US’s Nevada, Delaware, Montana, South Dakota, Wyoming and New York. In other words, it suits them to have one rule for themselves and another for those they wish to control. One can only assume that these countries allow this double standard to bolster their currency reserves.
America’s dollar makes up two-thirds of international debt and a like share of global reserve holdings. Oil and gold are still priced in Dollars, not Euros or Yen. Threats to be cut off from the dollar-based global payments system strike terror into Europe, Iran, China, North Korea, Russia etc.
Political leaders who once accepted the dollar’s hegemony, grudgingly or otherwise, are now pushing back. China challenged the dollar’s dominance in the global energy markets in March with a yuan-denominated crude oil futures contract. French Finance Minister told reporters that he wants financing instruments that are “totally independent” of the U.S.
The most immediate risk to the dollar is that the U.S. will overplay its hand on financial sanctions, effectively weaponising the dollar, particularly those against Iran and countries that do business with Iran. In response to what they perceive as an infringement on their sovereignty, European leaders are openly working on a payments system enabling their companies to do business with Iran without getting snagged by the U.S. Treasury Department and its powerful Office of Foreign Assets Control. Dissatisfaction with the dollar’s dominance is mounting.
Those using the USD for international trade must utilise a global payment system known as SWIFT (the Society for Worldwide Interbank Financial Telecommunication) for transactions.
SWIFT and the US dollar dominance give them significant leverage over other countries. China, Russia, and Iran have taken steps to limit their dependence on the dollar and have even been working to establish an alternative payment system to SWIFT. Many central banks have been buying gold to diversify their holdings away from the greenback. Even traditional U.S. allies have grown weary of American economic bullying. On Sept. 24, the E.U. announced its plans to create a unique payment channel to circumvent U.S. economic sanctions.
Trump and Biden weaponised the U.S. dollar, using its economic dominance as a carrot and a stick. So-called economic enemies” can find themselves locked out of the global financial system, which the U.S. effectively controls using the dollar. This situation will not last as countries will make other arrangements. ie Bartering of commodities, whilst other systems like Blockchain, etc., are introduced.
De-dollarization of the world economy would likely perpetuate a currency crisis in the United States, but a movement to dethrone the dollar is gaining steam.
The weaponisation of the United States dollar and the world’s Swift system has had undesirable results impacting us all. As the US dollar strengthens, it is making it more difficult for other global currencies to compete and is weakening the global economy. The Swift system is a payment platform banks use worldwide for international financial transactions. Still, it has increasingly been used by the US government to freeze foreign bank accounts to put pressure on countries and try to enforce US policy. This has not only caused economic problems in those countries, but it has also left them feeling powerless and undermined their trust in the global financial system. To create a more stable global economy, the world must work together to ensure that the international monetary system is fair and equitable. Is this likely to happen? That is not likely, given the current politics around using war as a tool to break Russia up.
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