• Global use of US Dollar as a currency of trade is declining
• Both, US western allies and the East are running away from US Dollar use
• However, how can the demise of US Dollar as a global currency of trade affects world economies?

Harare- The United States of America (USA) has for centuries managed to position its currency, United States dollar as the currency of global trade. However, the greenback is facing a multitude of headwinds from within the American continent and global wise, raising sentiments of a possible greenback’s crush as the global currency. But, what does the crush of US Dollar means to the global economies?

The history of the United States Dollar began with moves by the founding fathers of the USA to establish a national currency based on the Spanish silver dollar, which had been in use in the North American colonies of the United Kingdom for over 100 years before the United States Declaration of Independence.

The US dollar wasn’t the strongest currency of all time in history. The most sought-after global currency was the British pound. However, due to the escalation of the first world war and second world war, the Americas which was relatively unscathed by the war received the largest chunk of all-time gold reserves and started replacing the Pound as a currency of global trade. 

With the Bretton Woods agreement of 1944 a new international monetary system based on the US dollar was created, replacing the gold standard. The U.S. dollar became the global currency. Bretton Woods's agreement established the US dollar as the dominant purchasing unit in the world economy. After the agreement was signed, America was the only country with the ability to print dollars.

The strength and consistency of the US dollar have prompted many other countries to adopt the US dollar, sometimes as their national currency. “Dollarisation” is the process of the introduction of one national currency into another. Countries that have adopted the US dollar include East Timor, Ecuador, the British Virgin Islands, Federated States of Micronesia, Palau, Panama, Pitcairn Islands, El Salvador, Marshall Islands, Turks, Caicos and Zimbabwe. 

Between 1999 to 2019, the US dollar constituted 83% of global trade except in Europe where the Euro is dominant. This was supported by the size and strength of the U.S. economy, its stability and openness to trade and capital flows, strong property rights and the rule of law. As a result, the depth and liquidity of U.S. financial markets were unmatched, and there is a large supply of extremely safe dollar-denominated assets.

A key function of a currency is as a store of value which can be saved and retrieved in the future without a significant loss of purchasing power, a key characteristic that allowed the US Dollar to swim. One measure of confidence in a currency as a store of value is its usage in official foreign exchange reserves.

Through the establishment of the World Bank and International Monetary Fund which store its assets in US dollars (the USA has also the greatest share), the dollar has managed to expand its footprint in the region of Africa through the provision of loans and aid. 

Fall of Babylon

In biblical history, Babylon was the capital city of the ancient Babylonian Empire, which itself is a term referring to either of two separate empires in the Mesopotamian area in antiquity. These two empires achieved regional dominance between the 19th and 15th centuries BC, and again between the 7th and 6th centuries BC.

However, when the Persian Achaemenian dynasty under Cyrus the Great attacked Babylon in 539 BCE, the Babylon capital fell almost without stiff resistance.  However, the fall affected every state that was under Babylon and linked to Babylon, Babylon’s fall led to the fall of many cities. Is this the direction that the greenback is taking? Will the demise of US dollar as a global currency affect US alone or the global economy at large? From being a global superpower to be like anyone else? Is the greenback losing its global monopoly and grip in financial and capital markets?

Before 2000, the US Dollar contributed over 90% of global trade. By 2000, the dollar comprised 71% of globally disclosed official foreign reserves that, however, dwindled to 60% in 2021. However, it still far surpassed all other currencies including the euro (21 per cent), Japanese yen (6 per cent), British pound (5 per cent), and the Chinese renminbi (2 per cent). 

Although remaining dominant, the US dollar's share of total allocated reserves was 59% in the first quarter of 2022, unchanged from the fourth quarter and down slightly from 59.4% a year ago while the Chinese yuan's share of global reserves was 2.9%, up from 2.8% in the fourth quarter and 2.5% a year ago. The British pound rose to 5% from 4.8% in the prior quarter and 4.7% a year earlier.

Meanwhile, the euro, which is the world's second most widely held reserve currency, saw its share of the global total dip to 20% from 20.6% in the fourth quarter and 20.5% a year ago and the Japanese yen's share slipped to 5.4% from 5.5% in the prior quarter and 5.9% a year earlier.

Most of the biggest economies on earth have been making agreements with each other to move away from using the U.S. dollar in international trade to run away from America’s use of economic sanctions and freezing of assets to proffer its interest like what was done to Russia. However, this shift is going to have massive implications for the U.S. economy and US’s global dominance as a whole. 

China, and other emerging powers such as Russia, have been quietly making agreements to move away from the U.S. dollar in international trade over the past few years and the supremacy of the U.S. dollar is not nearly as solid as most Americans believe it to be. As the U.S. economy continues to fade, it is going to be really hard to argue that the U.S. dollar should continue to function as the primary reserve currency of the world.

Late in 2021, the second largest economy on earth (China) and the third largest economy on earth (Japan) struck a deal which will promote the use of their own currencies (rather than the U.S. dollar) when trading with each other. This was an incredibly important agreement that was virtually totally ignored by the U.S. media.  Currently, businesses in both countries need to buy US dollars before converting them into the desired currency, adding extra costs.

Due to a seasoned rivalry between the East and West, leaders from both Russia and China have been strongly advocating for a new global reserve currency for several years, and both nations seem determined to break the power that the U.S. dollar has over international trade while Russia and China have been using their national currencies when trading with each other for more than a year now.

In 2009, China became Africa’s biggest trading partner, and China is now aggressively seeking to expand the use of Chinese currency on that continent. China seems absolutely determined to change the way that international trade is done. At this point, approximately 70,000 Chinese companies are using Chinese currency in cross-border transactions.

Meanwhile, China and the United Arab Emirates have agreed to ditch the U.S. dollar and use their own currencies in oil transactions with each other. The UAE is a fairly small player, but this is a threat to the petrodollar system. What will happen to the petrodollar if other oil-producing countries in the Middle East follow suit? Petrodollar or Petro currency refers to the US dollar traded for worldwide crude-oil exports. It facilitates the investment of export gains as the dollar is the world’s reserve currency. The petrodollar emerged after the eradication of the gold standard on a global scale. As it is denominated in US dollars, its buying power depends upon the US inflation rate and (if required) exchange rate in the worldwide stock market. 

Iran has been one of the most aggressive nations when it comes to moving away from the U.S. dollar in international trade. For example, it has been reported that India will begin to use gold to buy oil from Iran. Also, who imports the most oil from Saudi Arabia? It is not the United States, it is China. Saudi Arabia and China have teamed up to construct a massive new oil refinery in Saudi Arabia, so how long is Saudi Arabia going to stick with the petrodollar if China is their most important customer?

The United Nations has been issuing reports that openly call for an alternative to the U.S. dollar as the reserve currency of the world while the International Monetary Fund has also published a series of reports calling for the U.S. dollar to be replaced as the reserve currency of the world. In particular, one IMF paper entitled “Reserve Accumulation and International Monetary Stability” actually proposed that a future global currency be named the “Bancor” and that a future global central bank could be put in charge of issuing it.

This year alone, March 2023, brought an economic bloodbath in the United States as one of its most prominent banks, the Silicon Valley Bank with over US$215 billion in assets collapsed. The bank suffered a loss of US$1.8 billion due to interest hikes on US Treasury Securities. Days later, New York-based Signature Bank, with over US$ 110 billion in assets, collapsed because its deposits exceeded the maximum permissible limits of the US Federal Deposit Insurance Corporation, while the share price of First Republic Bank, with over US$215 billion in assets, had fallen by 67%, and that of Western Alliance Bancorporation had fallen by 90%. Not only this, the credit ratings of almost every prominent private bank in the United States have been downgraded. Before all this, Silvergate Bank, another institution dealing in cryptocurrency, also failed because of liquidity issues in the first week of March 2023. The way American financial institutions are falling one after another predicts a kind of economic doomsday for the Western superpower.

The American dollar, once considered the only currency for global trade, is losing its shine and being replaced by other currencies. Naturally, it is going to impact the American economy in a big way and can trigger an economic catastrophe for the topmost superpower of the world.

However, the decline of the greenback will not be a US crisis only but a global crisis. Were the USD to collapse, the entire structure of the world economy would collapse for a while and go through cataclysms politically during that period. That usually leads to massive wars, starvation and mass homelessness around the world. The U.S. and Western economies would all face insolvency simultaneously and the entire Western industrial/consumer/credit economy would fall apart so fast it would make heads spin. The supply chain would stop and stores would empty quickly.

A one-world currency would be demanded – and implemented. Asia would fare horribly. If Western consumerism goes away, then the entire foundation of the Asia macro economy would instantly crash and stop cold. Africa, as a continent that leans on the West for rescue, will not be spared.

It would be a dark time worldwide…

Equity Axis News