• The crash of USA Banks and Ukrainian war have put US dollar’s dominance in jeopardy
• US dollar’s dominance as a global reserve currency fell from 60% in 2021 to 54.6% in 2022
• Is the US dollar demise as a global currency imminent?

Harare- Human history is defined by competition for valuable resources through trade agreements, political treaties, and brutal wars. Nowadays, countries' competition for resources is made by using the power of their local economies. The power of a nation is represented by the global value of its national currency in the international trade arena. Therefore, currency strength plays a cardinal role when measuring the dominance of a country in the global economy as well as international politics.

The United States’ dominance both in international economics and politics since post world war 2 is deeply rooted in the strength of its currency, which, however, some, including the BRICS members believe has reached its decaying stage. Is this a fact or a baseless myth? This is what this article seeks to unearth.

The recent crash of the United States of America’s prominent banks, exacerbated by the cost of the Russia-Ukraine War where the USA is spending billions to save the national sovereignty right for Ukraine and counter Russian aggression has sparked debate over the future of the economic global giant and its supreme currency, the US Dollar (King Dollar, greenback). Further, the recent spike in repo rates by the Fed has made the US dollar certainty pessimistic.

The future of the US Dollar came into uncertainty with the invasion of Ukraine which invited a bag of US and Western sanctions to the aggressor. However, states that are sympathetic to the dictatorial rule of Russia, joined Russia in a bid to accelerate the dethroning the US Dollar as a global currency of trade. In order to circumvent the sanction damages, Russia and affiliates, the BRICS members are running away from using the US Dollar in favour of the Chinese Yuan. However, the underlying question is, can Yuan topple the greenback overnight?

Further, it is worth noting that countries that are against the use of US dollar does not surpass 12 and their move to abandon the US Dollar is more of political than economic. Most countries in Asia, South and North America, Africa and Europe are still exposed to the greenback, especially in Africa where China’s influence is on an uproar. Of paramount importance is the total contribution to global economy, which is less than 24% in total. On the 11th of April 2023, one of the longstanding rival of USA Cuba, which banned US Dollars in 2021 reversed the policy as inflation and economic disorder is in an uproar. The same happened in Zimbabwe, Nigeria and Kenya. Though not gold-backed, confidence in the greenback is higher than any other currency and its demise can not come overnight.

Fundamentals of a strong currency

A currency's strength is determined by the interaction of a variety of local and international factors. Some of these factors are the inflation and growth in the domestic economy, the interest rates of the central bank, the demand and supply in the foreign exchange markets and the country's balance of trade. A currency is strong if it is becoming more valuable relative to another country's currency. A strong currency also has high utility across foreign markets and large reserves in foreign banks. A strong currency requires financial and monetary policies that are considered sound and anti-inflationary.

Taking all factors into consideration, the currency strength can be evaluated in three dimensions: Value: the relative purchasing power for goods and services in comparison to foreign currencies, Utility: the relevance as a financial valuation and exchange device in foreign economies and Reserve: the acceptability in international trade, driving foreign to hold reserves. This should be supported by strong economic fundamentals, including an unmatched gross domestic product (GDP), manufacturing sector and favourable employment stats.

China and the US are the two largest economies in the world, but they have different levels of GDP, GDP growth rate, and GDP per capita. China's GDP grew from 2.3 trillion to 14.9 trillion U.S. dollars between 2005 and 2020, while the US's GDP grew from 13 trillion to 20.8 trillion dollars in the same period. China's GDP per capita was 63rd in nominal terms and 76th in PPP terms in 2019, while the US's GDP per capita was 5th in nominal terms and 8th in PPP terms. The US still produces more than 24% of the world GDP with less than 5% of the world population, while China produces less than 16% of the world GDP with more than 23% of the world population. USA’s economy remains resilient to support the US dollar more thsn the Chinese does.

The USA also edges China in terms of manufacturing stats. Manufacturing gives a country national power abroad and provides a key to the reduction of trade deficits in the world. Without manufacturing, the local, regional, and national economies would suffer incredibly. The five most powerful countries in the world are countries that contribute a minimum of 75% of the world’s manufacturing production. The United States is the largest producer in the world when it comes to manufacturing, but it has a close battle with China. However, innovation is the key here, where China produces a lot of the same goods from one generation to the next. For example, Apple is all over the world, whereas China’s largest export is broadcasting equipment, which does not innovate at the rate that Apple products do by comparison. Therefore, when the U.S. exports most products or services, it creates a demand for dollars because customers need to pay for goods and services in dollars. Thus, they will have to convert their local currency into dollars by selling their own currency to buy dollars to make the payment.

In addition, China is one of the biggest nations that buy US bonds and securities. Bond payments are made in US dollars. This also applies to the purchase of U.S. corporate stocks from non-U.S. investors, requiring foreign investors to sell their currency to buy dollars to purchase those stocks. This is how the U.S. creates more demand for dollars, and that in turn puts pressure on the supply of dollars, increasing the value of the dollar relative to the currencies being sold to buy dollars.

Trade data from the U.S. Census Bureau shows that China invests heavily in U.S. Treasury bonds to keep its export prices lower. As of January 2021, China owned US$1.095 trillion of the total US$28 trillion U.S. national debt. Although there are worries about China selling off U.S. debt, which would hamper economic growth, doing so in large amounts poses risks for China as well, making it unlikely to happen.

The graph below shows US Treasury owned by China in US$ Trillions

Since 2023 commenced, the Fed has been hiking interest rates to save the dollar from collapsing. High-interest rates help promote a strong currency because foreign investors can get a higher return by investing in that country. Notwithstanding, the level of interest rates is relative. Tight fiscal discipline and anti-inflationary monetary policies help promote a strong currency but have fiscal problems. However, so do many other nations around the world including China.

Another advantage the US have in maintaining a grip on its currency monopoly is a strong government with a well-established rule of law and a history of constructive economic policies where market forces determine market performance not strong dictates from the state. These are the type of things that attract investment and thus, promote a strong currency. In the case of the U.S. dollar, its strength is further augmented by the fact that commodities are generally traded in dollars, and many countries use the dollar as a reserve currency.

In terms of sound economic fundamentals that support currency performance, USA has a tighter grip compared to the main rival, China.

Impact of BRICS+

It is cognisant that the US Dollar has been losing its global grip, but, its replacement by the Chinese Yuan is an unfounded reality. 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).

The graph below shows global reserve currencies share in percentage

The US Dollar remains the dominant reserve currency with its share of total allocated reserves quoted at 59% and slightly at 54.6% during the last quarter of 2022. 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 this makes it unreal for Yuan to topple the US dollar overnight. Meanwhile, the Euro is the world's second most widely held reserve currency not Yuan. However, the Euro 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.

Since 2014, the BRICS members have been quietly making agreements to move away from the U.S. dollar in international trade and the supremacy of the U.S. dollar is not nearly as solid as most Americans believe it to be.

In 2019, Russia and China announced a partnership to reduce their dependence on the dollar. This added to the gradual reduction in the dollar’s traffic from 90 percent in 2015 to only 46 percent in 2020 between the two nations. However, Dmitry Bykov, head analyst at ‘Russ Invest’ said more than 60 percent of Russian exports, and a third of the imports, use the dollar while a fifth of all bank deposits carried out in Russia is done using the dollar as well, although that trend has been declining since the start of 2020. By 2023, Russia has totally switched off from using the US dollar due to sanctions in preference for an alternative Chinese currency.

The same path has been followed by sympathetic dictators, Iran, Syria, India, Brazil, Argentina, Indonesia and China who are using either Rubble, Yuan, gold or their own currencies in trade to dwindle the demand for the greenback.

However, BRICS only accounts for 23 percent of the global economy, 18 percent of trade in goods and 25 percent of foreign investment while USA alone accounted for 15.3% down from 23.9% in 2019 due to a confluence of headwinds, mostly COVID-19 pandemic and Russia-Ukraine War.

Therefore, BRICS’ economic global contribution still falls short of that of USA alone, not including some key members in EU, NATO and UK who are still sympathetic to trade using US Dollar as an alternative currency to the Yuan.

Petrodollar Impact

On January 17, the Saudi minister of finance, Mohammed Al-Jadaan, announced that the Saudi state is open to selling oil in currencies other than the dollar.

If the Saudi regime does indeed embrace substantial trade in currencies other than the dollar as part of its oil-export business, this would signal a shift away from the dollar as the dominant currency in global oil payments. Other OPEC members including Russia have already sanctioned selling of oil using the greenback. Will a shift away from the dollar in the global oil trade really lead to a big relative decline in the dollar?  It should be cognisant that by 2030, most of the first world countries have vowed to stay away from oil for electric cars, meaning either way the petrodollar was going to collapse. Petrodollar will not lead to the demise of US dollar but will catalyse its decrease in global dominance. But a number of other dominoes would need to fall first, most especially the domino called “Eurodollars.” According to Market Insider stats, Eurodollar assets are at around $12 trillion and about $22 trillion in USA. So, the Eurodollar economy is very large, and this “dollar zone” is also a key component of many of the world’s leading economies, given that half or more of the world economy lies in that zone.

In contrast, in 2020, the petrodollar trade amounted to less than US$3.5 trillion annually. That’s not insignificant, of course, but even a sizable reduction in this amount will not on its own cause global demand for the dollar (relative to other currencies) to collapse. With so many trillions in dollar-denominated loans floating around the global economy, the petrodollar remains only a piece of a larger pie.

The more obvious short-term effects of the move away from the petrodollar will be in geopolitics rather than in the currency order.

Conclusion

Nevertheless, it can be conclusive to note that the end of the petrodollar is part of a larger and more important trend away from the dollar. Even if this trend continues, demand for the dollar will most certainly not disappear next week or next month, or next year. There is still a hoard of trillions of dollars’ worth of dollar-denominated debt in the global economy, and—for now, at least—that means continuing demand for dollars. Moreover, the dollar remains one of the safest currencies to keep on hand, given that the central banks in Japan, Europe, the United Kingdom and China, are hardly embracing “hard money.” Given that the US economy remains enormous, and US Treasuries remain at least as safe as other regimes’ bonds, foreigners will still keep a lot of dollars on hand to buy American assets. This is also true because—in spite of the myth that “America doesn’t make anything anymore”—foreigners also buy US products and services.

After all, the pound sterling did not cease to exist after its own fall from its vaunted position as the preferred global reserve currency. But it did become far less powerful. The dollar is headed in the same direction but, it is not imminent.

African nations which China is bedding have more confidence in US Dollar than the Yuan. This is a testament to the three largest economies, Nigeria, Kenya and South Africa. Zimbabwe, a long-time ally of China even during the peak of the multi-currency system never embraced the Yuan the way it did for the US Dollar, if the Yuan was ever embraced though.

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