• Brazil and China recently struck a deal to settle trade
  in their local currencies to bypass the US dollar.
  India and Malaysia have signed an accord to ramp up the usage of the rupee in
  cross-border business, and even France is starting to complete transactions in
  yuan.
• Many global leaders argue that the US dollar is being used
  to push America’s foreign-policy priorities, and punish those that oppose them.
• For more financial news, go to the News24 Business front page.

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All around the world, a backlash is brewing against the
hegemony of the US dollar. Brazil and China recently struck a deal to settle
trade in their local currencies, seeking to bypass the greenback in the
process. India and Malaysia in April signed an accord to ramp up the usage of
the rupee in cross-border business. Even perennial US ally France is starting
to complete transactions in yuan.

Currency experts are leery of sounding like the Cassandras
who have, embarrassingly, predicted the dollar’s imminent demise on any number
of occasions over the past century. And yet, in observing this sudden wave of
agreements aimed at sidestepping the dollar, they detect the sort of meaningful
action, however small and gradual, that was typically missing in the past.

For many global leaders, their rationales for taking these
measures are strikingly similar. The greenback, they say, is being weaponised,
used to push America’s foreign-policy priorities — and punish those that oppose
them.

Nowhere has that been more evident than in Russia, where the
US has brought unprecedented financial pain to bear on Vladimir Putin’s regime
in response to the invasion of Ukraine. The Biden administration has imposed
sanctions, frozen hundreds of billions of dollars of Moscow’s foreign reserves,
and, in concert with Western allies, all but ousted the country from the global
banking system. For much of the world, it’s been a stark reminder of their own
dependency on the dollar, regardless of what they think of the war.

And that’s the dilemma Washington officials face: By
increasingly relying on the greenback to fight their geopolitical battles, not
only do they risk denting the dollar’s preeminent place in world markets, but
they could ultimately undermine their ability to exert influence on the global
stage. To ensure long-term efficacy, sanctions are often better left as a
threat and not actually carried out, according to Daniel McDowell, author of
Bucking the Buck: US Financial Sanctions and the International Backlash Against
the Dollar.

“Now, a rational actor that knows it could potentially be in
that situation in the future is going to prepare for that scenario, and it does
make your coercive threats, your deterrent threats, less effective,” said
McDowell, the director of undergraduate studies in the political science
department at Syracuse University. “Maybe the change is marginal now, but even
if it ultimately culminates in something that doesn’t dethrone the dollar,” it
still matters in how it “can reduce American economic power.”

Usage of the dollar as a reserve currency is on the decline

Undoubtedly, part of the shift away from the dollar is being
orchestrated by China. President Xi Jinping is seeking to carve out a bigger
role for the yuan in the global financial system, and his government has made
expanding the currency’s use abroad a priority.

Yet much of the push is happening without Beijing’s
involvement.

India — hardly a strategic ally of China — and Malaysia in
April announced a new mechanism to conduct bilateral trade in rupees. It’s part
of a broader effort by the Narendra Modi administration — which hasn’t signed
on to the US-led sanctions campaign against Russia — to bypass the dollar for
at least some international transactions.

A month later, the Association of Southeast Asian Nations
agreed to boost the use of member currencies for regional trade and investment. And South Korea and Indonesia just weeks ago signed an
accord to promote direct exchanges of the won and rupiah.

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Brazilian President Luiz Inacio Lula da Silva lashed out at
the dollar’s dominance while visiting Shanghai in April. Standing at a podium
surrounded by the flags of Brazil, Russia, India, China and South Africa, the
so-called BRICS nations, he called on the world’s largest developing economies
to come up with an alternative to replace the greenback in foreign trade,
asking “who decided that the dollar was the (trade) currency after the end
of gold parity?”

He was harkening back to the early 1970s when the post-WWII
accord — known as Bretton Woods — that had made the dollar the centre of global
finance was unravelling. The agreement’s collapse did little to blunt the dollar’s
preeminent position. To this day, it serves as the world’s dominant reserve
currency, which has juiced demand for US bonds and allowed the country to run
massive trade and budget deficits

The currency’s centrality to the global payments system also
allows America to wield unique influence over the economic destiny of other
nations.

About 88% of all global foreign-exchange transactions, even
those not involving the US or US companies, are in dollars, according to the
most recent data from the Bank for International Settlements. Because banks
handling cross-border dollar flows maintain accounts at the Federal Reserve,
they’re susceptible to US sanctions.

While the campaign of financial punishments against Russia
is the latest and most high-profile example, both Democrat and Republican
administrations have used sanctions on countries including Libya, Syria, Iran
and Venezuela in recent years.

The Biden administration has averaged 1 151 new designations
per year to the Office of Foreign Assets Control’s list of specially designated
nationals, according to a recent report from the Center for Economic and Policy
Research. That’s up from an average of 975 during the Trump administration and
544 during President Obama’s first four-year term.

“Countries have chafed for decades under US dollar
dominance,” said Jonathan Wood, principal for global issues at consultancy
Control Risks. “More aggressive and expansive use of US sanctions in
recent years reinforces this discomfort – and coincides with demands by major
emerging markets for a new distribution of global power.”

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A representative for the Treasury referred Bloomberg to comments
Secretary Janet Yellen made in a mid-April interview with CNN, in which she
acknowledged that “there is a risk when we use financial sanctions that
are linked to the role of the dollar that over time it could undermine the
hegemony of the dollar.”

But she noted that the greenback “is used as a global
currency for reasons that are not easy for other countries to find an
alternative with the same properties.”

Market watchers agree. Even as more countries look to lessen
their reliance on the dollar, few expect its preeminent position in global
trade and finance to be threatened any time soon.

For one, there’s little sign any other currency could
provide the same level of stability, liquidity and safety, they say. What’s
more, the vast majority of the US’s advanced-economy allies, making up more
than 50% of the global gross domestic product, have shown little urgency in
pivoting from the greenback.

In fact, the dollar has rallied versus the bulk of its major
peers since the US stepped up its sanctions against Russia last year, a sign
that any decline in its global status is likely to be a long, slow process.

“I cannot see any asset replacing the dollar as the
dominant currency, not for the next generation,” said George Boubouras, a
three-decade markets veteran and head of research at K2 Asset Management in
Melbourne. “Nothing comes close to the might of the US economy. China has
its issues with ageing demographics, and the euro has struggled to truly gain
ground. The dollar will not be de-throned for the foreseeable future.”

BRICS Backlash

Still, the drumbeat of de-dollarization is continuing
unabated in the developing world.

Pakistan is looking to pay for Russian crude imports in
yuan, the country’s power minister said last month, while earlier this year the
United Arab Emirates said it was in early-stage discussions with India on ways
to boost non-oil commerce in rupees.

Earlier this week the BRICS nations asked the bloc’s
specially created bank to provide guidance on a how a potential new shared
currency might work, including how it could shield member countries from the
impact of sanctions such as those imposed on Russia.

“Without a doubt, de-dollarization is accelerating and
will continue for years to come,” said Vishnu Varathan, head of economics
and strategy at Mizuho Bank Ltd. in Singapore. “The US made a calculated
decision to use the dollar to inflict pain, and there’s likely to be long-term
consequences.”

(Updates with details of BRICS shared currency effort in
third to last paragraph.)

–With assistance from Monique Vanek, Mbongeni Mguni, Paul
Dobson, Paul Richardson, Daniel Flatley and Christopher Condon.