In the midnight musings of Brazil’s President Lula, a vexing conundrum lingers: why, in an age of shifting global power dynamics, must the lion’s share of his nation’s foreign transactions be conducted in dollars, rather than its native currency? Indeed, Brazil’s quandary is but a microcosm of the broader currency landscape faced by developing and emerging economies.
The omnipresence of the greenback is inescapable. Whether it is foreign loans, import and export contracts, or financial assistance, the dollar reigns supreme. In cross-border payments, the odds are even that a dollar will change hands, and for currency exchanges – even with neighboring nations – the path almost invariably leads through the U.S. currency. The world’s commodities, too, are largely beholden to the dollar.
A global reassessment is underway, as the balance of power tilts from the West to the rest, with China at the vanguard. The dollar’s continued dominance appears increasingly anachronistic. Yet, dislodging it is no simple feat.
Though the U.S. economy accounts for nearly a quarter of global GDP, its imports and exports constitute a mere ninth of worldwide trade. Nonetheless, the dollar features prominently in international transactions, underpinning approximately half of the global trade settlements and 42 percent of international payments via the Swift banking system. Furthermore, close to half of the world’s credit is denominated in dollars, solidifying the currency’s seemingly indomitable stature.
The dollar’s preeminence as the linchpin of the post-war global monetary system remains steadfast, even as that system began to crumble in the early 1970s and the role of the U.S. and the West in the global economy gradually wanes. Much like an “installed base” in business parlance, the dollar’s entrenched position can be self-perpetuating. Consider Microsoft’s four-decade-long dominance in personal computer operating systems, rivaled only by Apple in a considerably smaller capacity.
Nonetheless, the dollar has recently ceded some ground in certain areas. Following the invasion of Ukraine, Russian banks were swiftly expelled from the Swift system, and the country’s central bank assets were frozen in the West. These measures, coupled with previous U.S. sanctions against Iran, have prompted the development of regional payment systems as alternatives to Swift and a gradual decline in the dollar’s role in global central bank reserves.
But what could supplant the dollar? A global currency of its own? Brazil’s President Lula has contemplated a currency union with neighboring Argentina, which could eventually encompass other Latin American countries. The envisioned currency, dubbed the “sur,” already has a name. However, both South American countries have checkered histories of inflation, devaluation, and currency mismanagement, rendering the project’s chances of success, much like the Argentine exchange rate, virtually nil. While the European currency union did materialize, the euro has yet to evolve into a formidable rival to the dollar since its auspicious debut in 1999.
A glimpse at the global currency market, where currencies are exchanged against one another, reveals the dollar’s enduring dominance in the lion’s share of transactions. Yet, beneath the surface, subtle shifts are afoot. Sterling transactions remain modest but stable, while the yen and euro’s significance slowly diminishes. Gradually, the Chinese renminbi (or yuan) is beginning to ascend.
Data from the Bank for International Settlements may not yet reflect the full impact of the invasion of Ukraine, but anecdotal evidence suggests change is underway. Oil trade, traditionally denominated in dollars, has seen transactions in other currencies due to Russia’s boycott and attempts to circumvent it. The renminbi now accounts for less than 5 percent of global imports and exports, a figure that has doubled within a year. France, always skeptical of U.S. dominance, had its energy company Total sign a liquid gas contract in renminbi with China’s state-owned CNOOC.
Could this herald the rise of the Chinese currency? It is possible, given that China’s share of world trade stands at about 15 percent compared to the U.S.’s 11.5 percent. However, several factors hinder the renminbi’s liberation. Capital controls obstruct the free flow of money in and out of China, presenting a formidable barrier. In contrast, the U.S. financial market is deep, vast, and accessible.
Moreover, the rule of law raises concerns about the safety of assets held in renminbi. In the U.S., property rights are sacrosanct, and legal recourse is available to those seeking justice. Only when China can offer similar guarantees will the renminbi truly make headway. Affluent individuals seeking a secure haven for their capital outside the West currently favor Singapore or the Gulf States, not China. Thus, any significant shift in the renminbi’s fortunes may be a long time coming, if it happens at all.