May 13, 2023
Dollar is the name of the currencies of many countries, e.g., Singapore, Canada, US, Australia, Barbados, New Zealand, Hongkong and many other countries have their version of dollars. But US dollar is perceived as “The Dollar” in global economy ever since the end of second World War II (1945). All other dollars have remained of local / regional interest and never made their presence felt in world economy.
After the first world war, US overtook rest of the world in power and prosperity. So did US dollar in the world of currencies. After World War II, USSR (Soviet Union) aspired to be one more superpower and a rival to USA. This challenge ended in 1991, when USSR got divided into 15 independent states. Since the past couple of decades, China has become the second superpower, having larger share in manufacturing sector, more than even USA. All through this, currency-wise, US Dollar has maintained its place as world’s most preferred currency.
What are the qualities required in a currency to be used as global currency?
Any currency, to be acceptable in international trade and banking should have a few characteristics: -
1. It should be acceptable in international trade settlements.
Countries should be willing to pay for / receive the currency in international business.
2. It should be capable of storing value (reserve currency)
The value of the currency should not diminish over time, i.e., it should preserve or increase its value in international economy.
3. It should be used as unit of account, i.e., value of goods or services in international market should be expressed in the currency, and international transactions must be accounted in the said currency.
By and large, USD was the only currency which was fulfilling all the above characteristics. However, many counties have been mulling about the consequences / risks of the overwhelming monopoly of USD in world economy.
Emergence of Alternatives to US Dollar
In 2023, there is a view in many circles that dominance of USD in world commerce and economics may be challenged and circumvented by many countries.
Since the last decade, China has been pushing for CNY (Chinese Yuan) as the settlement currency. As of 2023, many oil producing countries are accepting payments in CNY, Rubles, and Euros. Many countries of the world have concluded agreements with other countries to settle the transactions in respective national currencies, bypassing the US dollar. In 2022, India and Russia agreed to conduct mutual trade in rubles and rupees.
As a retaliatory measure to US sanctions in the wake of Russia’s aggression against Ukraine, Russian President Putin mandated non-friendly countries to pay for Russian gas only in rubles.
Goaded by Russia and Brazil, BRICS (economic and trade lobby of Brail, Russia, India, China, and South Africa) nations are contemplating floating a new currency for trade settlements among BRICS members. If this comes through, it will be the biggest challenge to USD.
War in Ukraine evoked American sanctions against Russia and other countries supportive of Russia. This has set many countries of the world thinking of moving out of the stranglehold of USD in world trade and finance.
New mechanisms for settlement of international trade and financial transactions (Alternatives to SWIFT network)
SWIFT is a trade settlement system through which all instructions / financial information related to international financial and trade transactions are exchanged amongst the related banks. It has been the near monopolistic network for world-wide inter-bank financial telecommunications. SWIFT has been fulfilling this function since the late 70s. SWIFT is primarily USD based settlement system and is under the domination of US. Sanctions by the US against unfriendly / hostile countries would hamper operations in USD accounts and usage of SWIFT network.
Hence, simultaneously with measures to wriggle out of dependence on USD, many new settlement networks have emerged as the mechanism to settle international financial transactions and to counter the SWIFT network.
China came out with CIPS, a settlement system to settle trade deals in CNY. Similarly, European countries set up INSTEX network to facilitate non-USD transactions. Russia started SPFS, its own trade settlement system, the Russian equivalent of SWIFT and an alternative to SWIFT.
As a measure of de-risking (i.e., cutting the dependence on one currency and one country and one settlement system), countries are looking at non-USD trade and non-SWIFT trade settlement systems.
USD as a ‘Store of Value’
Traditionally precious metals (primarily gold) were considered as ‘store of value.’ The value of money was conserved by central banks with the custody of equivalent quantity of gold as the real value of the currency. After the practice of physical gold backing up paper currency (known as “gold standard”) was abandoned by US, US Dollar has become the standard currency where wealth is stored by countries and individuals. However, as a measure of prudence, no economy would like to put all eggs in one basket. Many countries are no longer investing further in USD accounts in the US. Instead, they are stocking up “good old gold” as a reserve, or other currencies such as CNY, Euros etc. Countries have realised that USD cannot not be their only foreign exchange reserve. Countries who have piled up their exchange reserves in USD accounts will feel the pinch if US imposes sanctions on them or USD value dips.
Outlook for USD
To sum up, while the world has been trying to unseat USD as the king of currencies for some decades now, the actual mechanisms and infrastructure in that direction is taking shape in the last decade and more in the last of couple of years, due to sanctions imposed by US in response to Ukraine war. Despite, other aspirant currencies may have to wait indefinitely to occupy the seat of USD.
US being the largest democracy of the world and a superpower committed to fairness and rule of law, its transparent financial system with checks and balances, most countries have no other option but to trust USD, more than any other currency. USD will continue as the prime currency for international settlements, investments by central banks, corporate and individual investors.
USD still serves as a single measure of value to specify for goods and services (unit of measure). Values are still expressed in terms of USD in global transactions, accounts, and statistics.
Countries may reduce their over-dependence on US Dollars over the next few years. However, CNY, Ruble or Euro replacing USD in international economy is not foreseen, for the simple reason that United States has far more credibility in the world than any other country, and so is the US Dollar.