Dollar: Hegemony in Crisis

The air is thick with talk of “de-dollarization”, “the end of dollar hegemony”. Members of the BRICS coalition are said to be encouraging each other to sell US dollars in their foreign exchange reserves and influencing other developing countries to do the same. The de-dollarization movement is expected to spread to all the expanded BRICS+ members in 2024. The new members are United Arab Emirates (UAE), Egypt, Iran, and Ethiopia. (Saudi Arabia has been invited to join the coalition, but has not yet announced its decision.)

Russia is the host of the BRICS+ summit in 2024 and is expected to focus the summit agenda on how to create alternatives to the dollar.

Also, countries of the Middle East and Africa are reported to be withdrawing part of their gold reserves from the US, including Nigeria, South Africa, Ghana, Senegal, Cameroon, Algeria, Egypt, and Saudi Arabia (Watcher.guru 2024). Gold hit its highest price per ounce ever in April 2024.

Moreover, a rising proportion of global oil payments are being settled in local currencies, not dollars. The proportion is estimated at around 20% of global oil payments in 2023.

In early 2024 China and Russia signed a trade agreement where they will use local currencies up to $260 bn. Around 95% of that sum will be settled in the Chinese Yuan, the remainder in the Russian Ruble and the Euro.

There are three different narratives in play as to why many developing countries are reported to be withdrawing part of their gold reserves from the US and selling dollars from their foreign exchange reserves.

Two of them are brought out in contrasting accounts of why the South African government has been withdrawing part of its gold reserves from the US.

One says South Africa’s government’s action is a response to intensifying worries about the stability of the US financial system. Africa News (2024) says, “With rising inflation rates and escalating debt levels signaling potential instability in the US financial system, experts in international finance suggest that South Africa is seeking to mitigate risks by reclaiming control over its precious metal assets…”

The second narrative says the government’s action is a response to its desperate need – in the face of the country’s huge foreign debts relative to GDP – to finance its current expenditures. According to Bloomberg, “South Africa’s cash-strapped Finance Minister Enoch Godongwana tapped the country’s gold and foreign-exchange reserves to steady its eye-watering debt, while boosting spending on teachers, nurses and welfare in a critical election year” (Bloomberg, 2024).

Of course, both narratives can be true in any one country, and their relative importance can vary from one country to another.

The third narrative is much more geopolitical. It says the drive to de-dollarize has been prompted by unease and even outrage at the US government’s overt “weaponization” of the dollar and the dollar payments system in the past few years, to sanction enemies like Iran, Cuba, Venezuela, Afghanistan, North Korea, China.

The US took dollar weaponization to a new level when it used the dollar payments system to freeze Russia’ s access to $300 bn of its liquid foreign exchange reserves in the wake of Russia’ s invasion of Ukraine in February 2022. Now influential voices are urging the US government to go further and appropriate those reserves (take ownership of them, not just freeze them) and give them to the government of Ukraine for post-war reconstruction (Sandbu 2023, Rasmussen 2024). Those who think their states might be subject to the same punishment have started to search anxiously for ways to escape their dependence on the dollar.

Yet for all the talk about the multiple reasons why many developing countries are looking to reduce their dependence on the dollar and dollar payments system, the dollar has soared on foreign exchange markets in 2024. The Chinese Yuan, Indian Rupee, Russian Ruble, Japanese Yen, British Pound Sterling all fell substantially against the dollar in 2024.

According to the Bank for International Settlements’ latest triennial survey, the dollar as of 2022 was part of 88% of all international transactions. That percentage is only slightly lower than it was in 1989, testimony to the dollar’s resilience.

Agreements to use national currencies in bilateral trade agreements are increasing and could speed up de-dollarization. But so far, they remain mostly at cosmetic scale. They are inherently limited by the fact that there are surplus and deficit countries in these exchanges. Surplus countries accumulate monetary assets in the currencies of the deficit countries and may be wary of doing so because of the risk of inconvertibility and depreciation. Deficit countries may worry that surplus countries will dump their currencies in international currency markets in the search for safer assets (Nogueira Batista Jnr 2023).

As for future prospects, creating a widely used international currency is bound to take decades. It took four to five decades from when the US surpassed Britain as a global economic power in the late nineteenth century to when it became the dominant financial power and the dollar the dominant international currency. European efforts to create its within-Europe international currency began in 1972 with the small “snake-in-the-tunnel” agreement to limit fluctuations between currencies; and culminated in 1999, 27 years later, with a common currency. Beijing may be thinking of a similar “slow but steady” internationalization of the Yuan, crossing the river one stone at a time.

On the other hand, in the past decade, major developing countries have started to create coalitions, from which the US is notably excluded or has excluded itself, such as the BRICS+, Asian Infrastructure Investment Bank, the New Development Bank, the Shanghai Cooperation Organisation, and of course China’s globe-spanning network of infrastructure alliances, the Belt and Road Initiative (BRI). In another decade or two, we may look back on this period, as the early stage of a new geopolitical and economic order, in which the US is more marginal than it has been for more than eight decades, including its currency. But as of the near future, most of the world has no prospect of a scalable alternative to the international dollar.