The Dollar’s Dominance on the Decline? An emerging will from developing countries to replace the dollar in international transactions could potentially reverse America’s hegemonic trend.
The most important tool of American coercion is weakening
If the White House had known in the not-so-distant past what future awaited the dollar, it might not have recklessly pursued unilateral economic sanctions against countries—sanctions that could bring civilization to the brink of destruction. The supernatural power granted to the dollar (USD) due to its universality has encouraged the United States to seek dominance in the world. However, the tide is turning, as there is a recent determination among developing countries to replace the dollar in their international transactions. This shift could potentially reverse America’s hegemonic trend.
It is worth noting that other countries, if unable to counter the United States militarily and culturally, might find salvation from dollar-induced damage and crippling sanctions through economic consensus and the elimination of the dollar from international transactions. However, this is currently still a theoretical discussion, and the U.S. dollar remains the number one global currency and is not expected to exit the field anytime soon.
A Brief History of the Global Reserve Currency
The U.S. dollar first emerged as an important international reserve currency in the 1920s. It replaced the British pound sterling and was protected from harm during World War I, as the U.S. was a major recipient of gold flows during the war.
Following the emergence of the U.S. as a stronger global superpower during World War II, the Bretton Woods Agreement of 1944 established the U.S. dollar as the primary global reserve currency and the only gold-backed currency post-war. Despite all links between the dollar and gold being severed in 1971, the dollar has remained the most important global reserve currency for international trade to this day.
Before the 1971 and 1973 agreements, OPEC oil was exclusively sold in U.S. dollars, known as “petrodollars,” creating permanent demand for dollars in the international currency market. However, since then, OPEC has also utilized the euro, yen, ruble, and other currencies.
The Bretton Woods Agreement of 1944 defined the post-World War II monetary order and relations between independent nations today by establishing a system of rules, institutions, and procedures to regulate the international monetary system.
This agreement led to the creation of the International Monetary Fund and other institutions, such as the World Bank, and established a framework for international payments and access to global capital markets using the U.S. dollar.
U.S. monetary policy is determined by the Federal Reserve System, known as the Central Bank of the U.S. It was established in 1913 under the Federal Reserve Act to provide a flexible currency for the United States and to oversee its banking system, especially after the Panic of 1907.
Examining the Global Decline of Dollar Dominance
When discussing dominance, particularly among crypto enthusiasts, the focus often shifts to the dominance of cryptocurrencies. Dominance refers to control or influence, and when discussing Bitcoin’s (BTC) dominance, it means the percentage of Bitcoin’s influence in the cryptocurrency market, or conversely, how much of the total market capitalization is in Bitcoin. The same concept applies to the dollar. Here, we want to assess what percentage of the global currency basket the dollar holds, or its dominance compared to other global currencies, and why the dollar’s dominance is currently declining.
According to data from the International Monetary Fund, the dollar’s share of the central banks’ reserve currency basket has decreased by 12%, from 71% in 1999 to 59% in 2021.
What is Causing the Decline in Dollar Dominance?
According to IMF data, the decline in dollar dominance is not a new phenomenon and has been occurring since the beginning of the new century. Additionally, the decline in dollar dominance reflects an increase in the diversity of central banks’ reserve portfolios.
Key reasons for the decline in dollar dominance compared to other currencies include:
1. Other currencies can offer higher returns with relatively lower volatility, making them increasingly attractive to central bank reserve managers as reserves grow and portfolio risk increases.
2. New financial technologies, such as automated market makers and automated liquidity management systems, make trading with smaller economy currencies cheaper and easier.
Additionally, in some cases, these currencies have bilateral swap lines with the Federal Reserve, providing an argument that they will maintain their value against the dollar.
3. The removal and replacement of the dollar by countries rivaling the U.S., such as China and Russia, from their trade transactions.
It is noteworthy that nearly 40% of the global central banks’ reserve currency basket consists of currencies that have bilateral swap lines with the Federal Reserve, such as the euro, Japanese yen, pound, Australian dollar, Canadian dollar, and others. This means that 90% of the world’s reserve currency basket is made up of currencies from countries that have very strong relationships with the U.S. and account for nearly half of the global gross production.
It can be confidently said that the G7 monetary system currently has complete dominance over the global economy. If we link the trend of declining dollar dominance to new actions by emerging economies against the dollar and hope that their actions can end dollar dominance, it is still premature and overly optimistic. This is because agreements and decisions by the G7 or allied countries have the most impact on dollar dominance and could even potentially increase dollar dominance globally.
1.The total amount of circulating dollars worldwide is $2.1875 trillion, which has grown by 300% compared to 1998.
2. The U.S. currently sanctions 20 countries, the most significant being China and Russia.
The World’s Desire for a Supra-National Currency
John Maynard Keynes, a prominent economist of the 20th century, proposed a supra-national currency for use as a unit of account in international trade, as a global reserve currency, during the Bretton Woods Conference in 1945.
A report published by the United Nations Conference on Trade and Development (UNCTAD) in 2010 also called for the removal of the U.S. dollar as the primary reserve currency.
The report suggests that the new reserve system should not be based on a single currency or even several national currencies, but should allow for the issuance of international liquidity to create a more stable global financial system.
Countries like Russia and China, as well as central banks and economic analysts, and groups such as the Gulf Cooperation Council, have expressed a desire for a new independent currency to replace the dollar as the reserve currency.
However, most countries recognize the U.S. dollar as the strongest global reserve currency.
On July 10, 2009, Russian President Dmitry Medvedev proposed a new global currency as a reserve alternative to replace the dollar during the G8 summit in London.
The Role of BRICS in the Decline of Dollar Dominance
It can be said that the only external threat currently facing the US dollar, which could potentially reduce its 60% dominance in the long term, is the consensus and agreement among BRICS member countries aimed at eliminating the US dollar and replacing it with a currency such as the Chinese yuan or the national currencies of other BRICS member countries in international transactions.
Currently, the news surrounding BRICS is all about de-dollarization. This is because these countries, particularly Russia and China, have suffered significantly from unilateral economic sanctions imposed by the US and enforced by its allies. Moreover, the consensus among the more powerful BRICS members and the Shanghai Cooperation Organization, including China, Russia, Brazil, and India, has led smaller economies and powers to overcome their fears of the US and support BRICS’ de-dollarization efforts.
Nouriel Roubini, a prominent Iranian economist, professor at New York University, and Chief Economist at Atlas Capital, known by the pseudonym “Dr. Doom,” discussed the future of the US dollar as a global reserve currency in an interview with the Indian media CNBC TV-18.
He explained that most countries in conflict with the US on the international stage are coming together to reduce their dependence on the dollar and are working to create an alternative economic, monetary, and global reserve system.
Roubini added, “These allies intend to move towards using the yuan (元), the official currency of China, as an alternative system to the US dollar.
They also aim to shift from a unipolar global reserve currency system to a bipolar currency system.”
This is not the first time Roubini has mentioned a bipolar currency system. In February, he warned that increased restrictions imposed by the US government on its adversaries, including financial sanctions, would be a catalyst for the emergence of a bipolar global reserve currency system in the coming decade.
Roubini believes that the eclipse of the dollar would not necessarily be a bad thing for the US. Given the additional responsibilities that come with issuing the world’s primary reserve currency, in a global economy where the US is no longer as dominant as before, the country could transform and reinvent its economic structure.
Challenges Facing BRICS in Eliminating the Dollar
BRICS countries face numerous significant challenges in their efforts to remove the dollar from their transactions and replace it with another currency. So far, apart from issuing symbolic statements, they have not achieved anything substantial in the direction of de-dollarization.
Most importantly, the key economies of this group, China and India, are staunch rivals who rarely cooperate on anything. Unless there is a change in the relationships among BRICS member countries, the idea that BRICS or even a larger group could pose a serious challenge to the dollar remains a fantasy.
BRICS is a group led by emerging economic powers, formed from the initials of the English names of its member countries: Brazil, Russia, India, China, and South Africa.
BRICS represents half of the world’s population and holds 28% of the world’s economic power. In 2012, the group’s GDP was $13.6 trillion.
Former Chinese President Hu Jintao believed that the BRICS group supports and enhances the status of developing countries and serves as a force for global peace.
1. In his latest speech, Putin harshly urged BRICS members to remove the dollar from their transactions.
2. BRICS is currently outpacing the G7 group in terms of GDP.
Currencies That Could Replace the Dollar
Chinese Yuan (元)
In March, the yuan surpassed the US dollar to become the most-used currency for cross-border transactions in China. Additionally, after many countries, Argentina is the latest to accept the yuan for transactions with China.
It can be stated that China is now the leading advocate of de-dollarization globally, and the only currency that might come to the aid of countries affected by US sanctions is the Chinese yuan. The yuan surpassing the dollar in cross-border transactions in China is not a minor event, as China, with an annual export volume of $3.1 trillion, has the highest export figures among other countries, and with an import volume of $2 trillion, is the world’s second-largest importer.
In March 2023, the yuan was used in 48.4% of all cross-border transactions in China, while the dollar’s share was 46.7%.
Recent data shows that the yuan accounts for 7% of total global currency transactions, marking the largest market share growth in the past three years.
Euro (€)
The euro is the closest follower of the dollar. For years, the dollar and euro have been the dominant global currencies, but it cannot be said that the euro would be a suitable alternative for the countries mentioned and those under US sanctions seeking a replacement for the dollar. Due to the close economic connections and ties between the dollar and the euro, any country sanctioned by the US is effectively also cut off from the euro.
However, recently European officials have made statements regarding de-dollarization in their financial system. For example, French President Emmanuel Macron has stated that Europe needs to reduce its dependence on the US dollar to avoid becoming a subordinate.
What European officials say and what they do are two separate issues. If Europe is determined to de-dollarize, it must demonstrate this in practice, which could be very costly for Europe but may be effective in the long term.
Currently, the euro’s share in international trade is 20%, down from 30% in 2010, indicating a decline in the euro’s share of international trade compared to other currencies. However, this should not be misunderstood; the euro still holds a significant position in international trade after the dollar.
Other Currencies
The above-mentioned currencies are significant because, firstly, the Chinese yuan has experienced the fastest growth among other currencies, and secondly, the euro is the primary follower of the US dollar. If we briefly consider other currencies, we should mention the Russian ruble, which experienced a significant decline following the Ukraine war, prompting the Russian government to make considerable efforts to strengthen the ruble. Another currency worth mentioning is the Japanese yen, which has a more stable presence in the global currency basket. Its current share in the global currency basket is 5.51%, and it has not experienced significant changes in recent years.
The next currency to consider is the British pound sterling, which was once the king of global currencies. This currency has followed a stable trend since 2010. Its dominance has increased from 3.7% in 2014 to 4.95% in 2022, similar to the growth experienced by the Chinese yuan.
Iran and the Dollar
The US dollar and the Iranian economy are closely linked. Despite its strong desire, Iran’s economy is significantly affected by the US dollar. A large portion of Iran’s international trade still occurs in dollars. Iranian officials constantly issue anti-dollar slogans every year, but in practice, they are unable to change this structure. Unlike China, India, and Brazil, which officially use the dollar and the SWIFT banking system and are also seeking alternatives, Iran is deprived of these systems due to UN and US sanctions, making international trade extremely challenging. Iran, a wealthy country, has incurred enormous economic, cultural, and political costs due to currency and banking sanctions in recent years, falling behind in competition with rival and neighboring countries.
According to economic experts, the dollar is the thermometer of Iran’s economy, and whenever the thermometer rises, it indicates a high fever in Iran’s economy. Iran’s currency issues cannot be solely attributed to the dollar, as Iran is subject to global sanctions. Even China and Russia follow these sanctions and are not allowed to openly trade with Iran or strengthen such trade. For example, Iran’s trade with China is generally in kind, and if any currency is involved, it is physically delivered to Iran.
It seems that to resolve its currency and banking issues, Iran must first address its problems with the sanctioning countries and then pursue de-dollarization in its financial system. This is because, for example, even if the US dollar were to be replaced by another currency, which might realistically happen in 50 years, that currency would also emerge from international consensus, most of which agree on sanctions against Iran.
Nevertheless, the Iranian government has a firm resolve to de-dollarize its economy. Iranian President Ebrahim Raisi announced in a speech that he is seeking to cut the economic umbilical cord to the dollar.
In this context, an Iranian economic expert addressed the dominance of the dollar in Iran’s economy and stated, “Iran’s economy has been under the dominance of the dollar for the past 50 years, and its exchange rate has been stabilized against the dollar. Does Mr. Raisi intend to stabilize the exchange rate with another currency, such as the Chinese yuan?”
He emphasized, “It is unlikely that a serious and substantive change will occur in this regard as long as currency inflows and outflows in Iran are not facilitated, and Iran remains sanctioned. The slogan of de-dollarization is nothing more than an illusion.”
1. After European sanctions against his country, Putin asked European countries to settle the payment for Russian gas exports in rubles.
2. Iran’s trade volume with its strongest economically, China, is $16 billion. This figure is over $700 billion between the US and China.
The Importance of Cryptocurrencies in the Decline of Dollar Dominance
Satoshi Nakamoto’s goal in creating Bitcoin was to end the dominance of fiat currencies and central banks, which have gained immense power through money printing and exploiting public trust for their benefit. This article does not intend to delve into the philosophy of Bitcoin and fiat currencies; rather, it focuses on the decline of dollar dominance and the importance of cryptocurrencies in this context.
Currently, Bitcoin might be the closest currency resembling John Maynard Keynes’s vision of a supranational currency. However, the global view of cryptocurrencies remains more investment-oriented, serving primarily as a store of value rather than a full-fledged medium of exchange. Due to their high price volatility, Bitcoin and other cryptocurrencies are not yet fully trusted by people and governments as a currency or medium of exchange. Nevertheless, there are individuals, institutions, and governments that have accepted cryptocurrencies as a means of exchange, such as the Russian government, which has recently sought to authorize businesses to use cryptocurrencies for cross-border transactions.
Another example of using cryptocurrencies as an official currency is El Salvador. After the President of El Salvador adopted Bitcoin as the country’s official currency, it has not been widely embraced by the people. Statistics show that both individuals and businesses in El Salvador have suffered significant losses from using Bitcoin as an official currency, and many people are not yet familiar with Bitcoin and other cryptocurrencies. Overall, it can be said that cryptocurrencies currently make up a very small share of the global currency basket and do not pose a significant threat to fiat currencies. However, shortly, when humanity faces increasing inflation and economic inefficiencies, no refuge might be as secure as Bitcoin.
While the use of Bitcoin as a currency is prohibited by most governments, its use for investment purposes is not, highlighting its importance to governments.
Sources: International Monetary Fund (IMF), Bloomberg, BRICS Information Portal, Bitcoin.com, CoinMarketCap, Stock and Market Site, United Nations Statistics, Economy News, Investopedia
