In a speech he gave during his April visit to China, Brazilian President Luiz Inácio-Lula da Silva said, “Every night I wonder myself why all countries must rely their trade on the dollar. Why aren’t we able to conduct trade using our own currencies? Who made the decision that the dollar will replace the gold standard as the dominant currency? In 2023, the globe is ready to build on 2018’s seismic tendencies and accelerate the process of de-dollarization as US politicians continue to weaponize the usage of their country’s currency, as evidenced by his statements resonating across much of the global media complex.
Indeed, at a G10 (Group of Ten) meeting in Rome in 1971, US Secretary of the Treasury John B. Connally famously said to a room of European peers, “The dollar is our currency, but it is your problem.” The fear that an increasingly hostile US could target any weak country has, however, led to a global wave of dedollarization that has dramatically sped up since a barrage of economic sanctions were levied by US-led Western powers against Russia for its invasion of Ukraine, making that “problem” an existential issue for many countries 50 years later.
Thus, de-dollarization has emerged as a perfectly rational course of action for many countries, especially those that formerly depended on the US dollar and suffered as a result. The desire to de-dollarize has increased this year as more countries look to diversify their exposures in international markets. Examples include the imposition of sanctions that prevent a country from accessing dollars on international markets, the freezing of a country’s dollar-denominated assets held within Western apex financial institutions, or the exclusion of a country’s banks from the dollar-denominated SWIFT payment system.
Central banks all around the world often hold substantial amounts of dollar-denominated assets, such as US Treasuries and corporate bonds, as the dollar serves as the world’s reserve currency. The US is able to accumulate significant trade and government deficits thanks to its privileged position. “For the United States, the money that is spent on running a balance-of-payments deficit on [the] military account and on American investors buying Chinese stocks and Chinese companies, dollars are recycled back to the United States to buy US Treasury bonds,” says Michael Hudson, professor of economics at the University of Missouri-Kansas City and author of Super Imperialism – New Edition: The Origin and Fundamentals of U.S.
But it has been evidently seen over a number of decades that central banks’ willingness to maintain such high concentrations of dollar assets among their reserves has consistently declined. The US dollar held a commanding 85 percent of the world’s reserve currency in the late 1970s. According to data from the COFER (Currency Composition of Official Foreign Exchange Reserves) of the International Monetary Fund (IMF), that percentage has only reached 58.4 percent by the end of 2022. Few would dispute that the US dollar’s share of reserves is not on a long-term downward trajectory, even though the IMF noted that share increasing slightly to 59.02 percent in this year’s first quarter. It still dwarfs the next most widely used currency, the euro, at 19.77 percent.
This decline can be partially attributed to the leading central banks’ shifting preferences over the past several years, which have led them to accumulate gold while concurrently moving away from the dollar. These trends were amplified in the World Gold Council’s (WGC’s) 2023 survey, which was released on May 30. It showed how developing economies, particularly China, India, Turkey, and Egypt, have taken the lead in purchasing gold this year. While a similar percentage of respondents (24 percent versus 25 percent) stated they have plans to increase their gold holdings, the survey, which included 59 central banks in total, found that 71 percent of respondents expected global central bank gold holdings to rise in the next 12 months.
Additionally, the study revealed even greater pessimism regarding the future of the dollar’s function than that of prior surveys, particularly among the EMDE respondents, although finding strong confidence regarding the forecast for the role played by gold within the reserves of the world’s central banks. Only 20% of respondents from emerging markets (EMDE) agreed that the US dollar’s percentage of global reserves will remain stable in five years, compared to 54% of respondents from advanced economies. 58 percent of respondents from developing economies (EMDE) predict that the US dollar’s proportion of global reserves will decline, compared to 46% of those from advanced economies.
Trust in gold and some degree of scepticism in the dollar are underlying current trends, as central banks are displaying in 2023. And China is setting the pace in this area by exhibiting the most passionate demand for further gold—and the least desire for dollars. The official amount of gold bullion now held by the People’s Bank of China (PBOC) is 2,137 tonnes, with almost 188 tonnes gained since the start of its bull run in November 2022. In July, the PBOC increased its gold holdings for a ninth consecutive month by 23 tonnes. Meanwhile, China’s Treasury holdings have been steadily being sold off to the tune of $846.7 billion, according to the most recent official US data for significant foreign holders of Treasury assets through May 2023.
Such patterns strongly suggest that gold will be a key component of any future theft of the dollar’s position as the primary reserve currency around the world. And some others even think such scenario might soon come to pass. For instance, the New York-based, natural resources-focused investment firm Goehring & Rozencwajg (G&R) has opined that the dollar may soon lose its role as the world’s reserve currency, which it believes would be the most significant market shock in the previous 40 years. Leigh Goehring, managing partner at G&R, noted that because China has a closed capital account and the nations that trade in the yuan are unable to exchange it, gold can be used to address a variety of issues. “How on earth could you possibly trade renminbi?
They intend to settle everything eventually with gold, Goehring said in a June interview with metals publication Kitco News. “Gold convertibility must be present in some form in any attempt by China to replace the US dollar as the world’s reserve currency. The Shanghai gold market would then allow foreign holders to convert a portion of their trade surplus from yuan into gold.
And with central banks now purchasing more gold than at any time since at least the 1950s, when such records began, and currently accounting for a record 33 percent of monthly global demand for gold, Ruchir Sharma, chair of Rockefeller International, recently noted that this buying boom is not only pushing gold prices to close to record highs but also 50 percent higher than what models based on real interest rates would suggest. “It’s obvious that fresh factors are pushing up gold prices. When you look closely at the central bank purchases, you’ll see that nine of the top 10 countries, including China, Russia, and India, are in the developing world, Sharma said in a piece for the Financial Times on April 23.
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In fact, much of the globe is now asking why bilateral and multilateral trade that does not directly include the United States should necessitate the compulsory use of the dollar. This is similar to how President Luiz Inácio-Lula da Silva openly questioned the dollar’s role during his historic visit to China. As a result, the influence of the dollar in international trade agreements and transactions continues to decline. Furthermore, the renminbi is frequently used as a replacement currency because China is currently the largest global trading power. The two BRICS (Brazil, Russia, India, China, and South Africa) countries will conduct their extensive trade of primarily agricultural items, as well as financial activities, by directly exchanging renminbis, as Brazil itself signed a number of agreements with Beijing in late March.
The conclusion of China’s first-ever yuan-settled LNG (liquefied natural gas) trade through the Shanghai Petroleum and Natural Gas Exchange (SHPGX) between national oil company CNOOC (China National Offshore Oil Corporation) and France’s TotalEnergies SE may be the action with the most symbolic significance thus far regarding the likely future direction of global commodities trading. The transaction, according to the exchange’s chairman Guo Xu, supported “multi-currency pricing, settlement, and cross-border payment,” and the “financial infrastructure of cross-border yuan settlement” would offer “more convenient channels for domestic and international oil and gas resources,” he added. Yu Jin, the general manager of CNOOC, admitted that trading of resources on a yuan basis may “promote the globalisation of energy trading and build a more diversified ecology.”
TotalEnergies “simply explained that this unprecedented yuan transaction was ‘a request from CNOOC’ in a hydrocarbon market where purchases have long been settled in dollars,” according to French economic news site La Tribune.
The historic agreement shows that non-dollar bilateral commerce inside global commodities markets is feasible—and possibly even preferable—which, in turn, might create the framework for more such transactions to come given France’s status as a Western ally of the US. The largest blow to the global dollar hegemony, if it materialises, would be delivered by Saudi Arabia and other significant Western Asian nations pricing their oil exports in yuan and other non-dollar currencies.
Since the vast majority of international transactions involving oil and other important commodities are priced in US dollars, there must be a significant daily demand for the US dollar, sometimes known as the “petrodollar” in this context, in order to make such transactions possible.
However, Chinese President Xi Jinping proposed that China and Arab governments use the Shanghai Petroleum and National Gas Exchange as a platform for facilitating the settlement of oil and gas trades in yuan during a historic trip to Riyadh, Saudi Arabia, in December 2022.
China will keep purchasing substantial amounts of crude oil from the Gulf, increase its purchases of liquefied natural gas, and intensify its collaboration in upstream oil and gas development.The Chinese president reiterating during his tour, “and fully utilise the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade.”
While such a deal does not necessarily indicate that all barrels of oil coming from the Arab world would soon be priced in Chinese money, it does mark yet another significant step in the de-dollarization process that several nations are assiduously pursuing.
There is a sense of inevitable that non-dollar currencies will be used to price at least some of the Kingdom’s oil output in the not too distant future, especially with Saudi Arabia appearing to be on the verge of joining the BRICS economic grouping, which attempts to improve trade and collaboration among member nations.
A “huge step” for China and “a significant setback to the dollar’s standing,” according to Ashok Swain, a professor of peace and conflict study at Uppsala University in Sweden, will be the oil trade in the yuan. “There is no doubt that Saudi Arabia joining the China-dominated SCO (the Shanghai Cooperation Organisation) and BRICS,” Swain continued, speaking to US-based Western Asia news site Al-Monitor.
This may help to explain why the US is working so hard to stop Saudi Arabia from strengthening its ties with China. The Saudis have agreed to an initial broad plan with the US to recognise the state of Israel in exchange for concessions to the Palestinians, US security guarantees, and civilian nuclear assistance, according to the Wall Street Journal (WSJ), which quoted anonymous US sources. According to the officials, the US might ask Saudi Arabia for guarantees that it won’t permit China to develop military sites in the country—an issue that has become contentious between the Biden administration and [the] United Arab Emirates.
The largest and most liquid financial markets in the world, including the global stock and bond markets, use it as their primary and de facto currency. Realistically, there aren’t any viable alternatives to the dollar that can take its place anytime soon, especially as the yuan continues to make up a small portion of global trade and has a closed capital account due to restrictions imposed by the Chinese government. Furthermore, the world’s largest payment network, SWIFT, which has 11,000 member institutions spread across 200 countries and territories and processes more than 42 million transactions daily with an average value of almost $5 trillion, continues to use the dollar as its de facto currency.
But it should also be noted that the majority of nations do not currently have any plans to overtake the US dollar as the primary reserve currency in the globe. Instead, their main objective is to acquire sufficient diversity in the direction of other kinds of money and stores of value so that, should they be the target of punitive economic actions led by the US, they would have options. As a result, even though the dollar won’t be overthrown anytime soon, the gradual move away from it will continue to reduce its global influence for the time being, enhancing the chances of true global multipolarity and providing many countries with potentially vital economic lifelines.