King Dollar is facing a revolt.
Tired of a too-strong and newly weaponised greenback, some of the world’s biggest economies are exploring ways to circumvent the US currency.
Smaller nations, including at least a dozen in Asia, are also experimenting with de-dollarisation. And corporates around the world are selling an unprecedented portion of their debt in local currencies, wary of further dollar strength.
No one is saying the greenback will be dethroned anytime soon from its reign as the principal medium of exchange. Calls for “peak dollar” have many times proven premature. But not too long ago it was almost unthinkable for countries to explore payment mechanisms that bypassed the US currency or the SWIFT network that underpins the global financial system.
Now, the sheer strength of the dollar, its use under President Joe Biden to enforce sanctions on Russia this year and new technological innovations are together encouraging nations to start chipping away at its hegemony. Treasury officials declined to comment on these developments.
“This will simply intensify the efforts in Russia and China to try to manage their part of the world economy without the dollar,” said Paul Tucker, a former deputy governor of the Bank of England in a Bloomberg podcast.
Writing in a newsletter last week, John Mauldin, an investment strategist and president of Millennium Wave Advisors with more than three decades of markets experience said the Biden administration made an error in weaponising the US dollar and the global payment system.
“That will force non-US investors and nations to diversify their holdings outside of the traditional safe haven of the US,” said Mauldin.
Plans already underway in Russia and China to promote their currencies for international payments, including through the use of blockchain technologies, accelerated rapidly after the invasion of Ukraine. Russia, for example, began seeking remuneration for energy supplies in rubles.
Soon, the likes of Bangladesh, Kazakhstan and Laos were also stepping up negotiations with China to boost their use of the yuan. India began talking up more loudly the internationalisation of the rupee and just this month, started securing a bilateral payment mechanism with the United Arab Emirates.
Progress however appears to be slow. Yuan accounts haven’t gained traction in Bangladesh for example due to the nation’s wide trade deficit with China. “Bangladesh has tried to pursue de-dollarisation in trade with China, but the flow is almost one-sided,” said Salim Afzal Shawon, head of research at Dhaka-based BRAC EPL Stock Brokerage Ltd.
A major driver of those plans was the move by the US and Europe to cut off Russia from the global financial messaging system known as SWIFT. The action, described as a “financial nuclear weapon” by the French, left most major Russian banks estranged from a network that facilitates tens of millions of transactions every day, forcing them to lean on their own, much smaller version instead.
That had two implications. First, the US sanctions on Russia stoked concern that the dollar could more permanently become an overt political tool — a concern shared especially by China, but also beyond Beijing and Moscow. India, for example, has been developing its own homegrown payments system that would partly mimic SWIFT.
Second, the US decision to use the currency as part of a more aggressive form of economic statecraft puts extra pressure on economies in Asia to choose sides. Without any alternative payments system, they’d run the risk of being compelled into compliance with, or enforcement of, sanctions they may not agree with — and losing out on trade with key partners.
Bloomberg“The complicating factor in this cycle is the wave of sanctions and seizures on USD holdings,” said Taimur Baig, managing director and chief economist at DBS Group Research in Singapore. “Given this backdrop, regional steps to reduce USD reliance are unsurprising.”
Recent moves to circumvent the dollar
India is firming up plans with the United Arab Emirates to settle bilateral transactions in their local currencies
China celebrated a record-high 49.1% of cross-border payments and receipts transacted in yuan in the first half of 2022
Indonesia announced expansion of its local currency settlement with central banks in South Korea and Australia
Southeast Asian issuers sold local-currency debt at a record pace through the first three quarters of the year
Central bank in Laos reportedly barred commercial banks from selling foreign currencies
Just as officials across Asia are loath to pick a winner in US-China tussles and would prefer to keep relations with both, the US penalties on Russia are pushing governments to go their own way. Sometimes the action takes a political or nationalist tone — including resentment of Western pressure to adopt sanctions on Russia.
Moscow looked to convince India to use an alternative system to keep transactions moving. Myanmar’s junta spokesman said the dollar was being used to “to bully smaller nations.” And Southeast Asian countries pointed to the episode as a reason to trade more in local currencies.
“Sanctions make it more difficult – by design – for countries and companies to remain neutral in geopolitical confrontations,” said Jonathan Wood, head of global risk analysis at Control Risks. “Countries will continue to weigh economic and strategic relationships. Companies are caught more than ever in the crossfire, and face ever more complex compliance obligations and other conflicting pressures.”
It’s not just the sanctions helping to accelerate the de-dollarisation trend. The US currency’s rampant gains have also made Asian officials more aggressive in their attempts at diversification.
The dollar has strengthened about 7% this year, on track for its biggest annual advance since 2015, according to a Bloomberg index of the dollar. The gauge reached a record high in September as dollar appreciation sent everything from the British pound to the Indian rupee to historic lows.
The dollar’s strength is a huge headache for Asian nations who’ve seen prices of food purchases soar, debt-repayment burdens worsen and poverty deepen.
Sri Lanka is a case in point, defaulting on its dollar debt for the first time ever as a soaring greenback crippled the nation’s ability to pay up. Vietnamese officials at one point blamed dollar appreciation for fuel-supply struggles.
Hence moves such as India’s deal with the UAE, which accelerates a long-running campaign to transact more in the rupee and to set up trade settlement agreements that bypass the US currency.
Meanwhile, dollar-denominated bond sales by non-financial companies have dropped to a record low 37% of the global total in 2022. They’ve accounted for more than 50% of debt sold in any one year on several occasions in the past decade.
While all these measures may have a limited market impact short term, the end result may be an eventual weakening of demand for the dollar. The Canadian dollar and Chinese yuan’s shares of all currency
trades, for instance, are already slowly edging higher.
Technological progress is another factor facilitating efforts at moving away from the greenback.
Several economies are chipping away at dollar use as a by-product of efforts to build new payment networks — a campaign that pre-dates the surging greenback. Malaysia, Indonesia, Singapore and Thailand have set up systems for transactions between each another in their local currencies rather than the dollar. Taiwanese can pay with a QR code system that’s linked with Japan.
All-in, the efforts are driving momentum further away from a West-led system that’s been the bedrock for global finance for more than half a century. What’s emerging is a three-tier structure with the dollar still very much on top, but increasing bilateral payment routes and alternative spheres such as the yuan that seek to seize on any potential US overreach.
And for all the agitation and action afoot, it’s unlikely the dollar’s dominant position will be challenged anytime soon. The strength and size of the US economy remains unchallenged, Treasuries are still one of the safest ways to store capital and the dollar makes up the lion’s share of foreign-exchange reserves.
The renminbi’s share of all foreign-exchange trades, for example, may have climbed to 7%, but the dollar still makes up one side of 88% of such transactions.
“It’s very hard to compete on the fiat front — we have the Russians doing that by forcing the use of rubles, and there’s wariness with the yuan as well,” said George Boubouras, three-decade markets veteran and head of research at hedge fund K2 Asset Management in Melbourne. “At the end of the day, investors still prefer liquid assets and in this sense, nothing can replace the dollar.”
The #BISTriennialSurvey shows that the USD was on one side of 88% of all #FX trades, unchanged from 2019. The share… https://t.co/mchQVG7fG4— Bank for International Settlements (@BIS_org) 1666878121000Nevertheless, the combination of moves away from the dollar are a challenge to what then-French Finance Minister Valéry Giscard d’Estaing famously described as the “exorbitant privilege” enjoyed by the US. The term, which he coined in the 1960s, describes how the greenback’s hegemony shields the US from exchange-rate risk and projects the nation’s economic might.
And they may ultimately test the entire Bretton Woods model, a system that established the dollar as a leader in the monetary order, which was negotiated at a hotel in a sleepy New Hampshire town at the close of World War II.
The latest efforts “do indicate that the global trade and settlement platform that we’ve been using for decades may be beginning to fracture,” said Homin Lee, Asia macro strategist at Lombard Odier in Hong Kong, whose firm oversees the equivalent of $66 billion.
“This entire network that was born out of the Bretton Woods system — the Eurodollar market in the 1970s and then the financial deregulation and the floating rates regime in the 1980s — this platform that we have developed so far may be beginning to shift in a more fundamental sense,” Lee said.
The net result: King Dollar may still reign supreme for decades to come, but the building momentum for transactions in alternate currencies shows no sign of slowing — particularly if geopolitical wild cards continue to convince officials to go their own way.
And the US government’s willingness to use its currency in geopolitical fights could ironically weaken its ability to pursue such methods as effectively in the future.
“The war in Ukraine and the sanctions on Russia will provide a very valuable lesson,” Indonesian Finance Minister Sri Mulyani Indrawati said last month at the Bloomberg CEO Forum on the sidelines of the G-20 meetings in Bali.
“Many countries feel they can do transactions directly — bilaterally — using their local currencies, which I think is good for the world to have a much more balanced use of currencies and payment systems.”