The mighty US dollar that reigned supreme for several decades is witnessing a challenge to its dominance. There is a noticeable shift from US dollar to local currencies.
So far, over 20 countries have decided to trade with each other in their own currencies. This trend is on the rise and also includes countries that are close allies of the United States.
This shift undermines US’ and its allies’ politics of containment of China and sanctions on Russia on account of the Ukraine war.
In the past, there were few instances where countries selectively opted to trade in commodities in their own currencies, notably, between Japan and China and Brazil and China.
The current switch to trade in local currencies is on a much larger scale with multiple dynamics of global diplomacy, politics and perhaps the rise of a new world order.
To begin with, it is wrapped in the facade of economic diplomacy which appears legitimate in these times when national economies are stressed globally and are looking more towards their own national salvation.
If one delves a little deeper into the circumstances leading to the shift and the motives of those countries propelling and leading the change, it is not difficult to visualise that the currency shift is only a part of a much larger picture to unfold systematically in the coming years.
The prime movers for this “seismic shift” are three countries, namely Saudi Arabia, China and Russia that are heavyweights in their own right.
They have spun out of the orbit of the unquestioned loyalty to the plans and rules of the global financial system dominated by the US. Piqued by the growing imbalances in world politics and economy and hegemony of one super-power, they all have a compelling reason to do so.
Saudi Arabia, under the leadership of an ambitious and bold reform-oriented Crown Prince (de facto ruler), Mohammad bin Salman, has vowed to put an end to business as usual with Saudi Arabia and the country’s dependence in the areas of economy and security on one super-power.
There is an awakening that the country, mighty in its own right, is a super-power, which has all the ingredients to move out of the shackles of dominance of a global super-power. It found in China the right mix to partner with to move out of the orbit of subservience.
Whereas, China needs to counter the US and its allies’ policy of its containment and isolation. Russia needs a way out to beat sanctions imposed by the US and its allies on account of the Ukraine war. For the three the need for a new world order is of common interest and inevitable for securing their interests. So far they are on a winning spree.
Brazil and Japan, the close allies of the United States, have recently joined the trend by expanding their bilateral currency trade.
Brazil and China signed a deal last week to trade in their local currencies while Japan joined hands with sanctions-hit Russia to pay for its oil by breaching the $60 cap, thanks to a waiver from the US.
China is Brazil’s biggest trading partner with their bilateral trade reaching US$150 billion in 2022. China’s currency, the Renminbi (RMB), has also become Brazil’s second-largest international reserve currency.
Saudi Arabia, one of the biggest exporters of crude, is contemplating trading with China in Saudi Riyals and Chinese Yuan.
Iran, which has been disconnected from a West-led international money transfer system SWIFT in 2019 over its nuclear project, has been trading with alternate payment routes since then.
The Indian Rupee (INR) is now accepted by 18 countries from across the globe for transactions. The Indian Union Minister of State for Finance, Bhagwat Kishanrao Karad, recently informed the Indian Parliament that Reserve Bank of India (RBI) has permitted banks from 18 countries to open Special Vostro Rupee Accounts (SVRAs) to settle payments in rupees. India is procuring oil from Russia in INR.
Pakistan, which desperately needs to trade with PKR, is unfortunately nowhere on the map.
With France in the lead, the European Union is hitting a reset button on its ‘lop-sided’ relations with its ally by charting its own independent course that is leading to Beijing.
Australia, Singapore and other important countries in the Asia-Pacific region are moving towards China with policies based on their countries’ interests rather than a fixed alliance.
In light of fast-changing dynamics in the world of trade and finance, China’s yuan has surpassed the dollar for the first time in monthly trading volume in Russia, according to data provided by Bloomberg in February this year.
One of the main topics of the next BRICS — a bloc of Brazil, Russia, India, China, and South Africa — summit that will be held in South Africa in August aims to create a mechanism to trade settlements in national currencies among member states.
The US dollar has been the world’s reserve currency since 1944, following the Bretton Woods Agreement, replacing the British sterling by the end of World War II. For many analysts, this shift directly challenges the dominance of the US financial system, one of Washington’s most potent tools to exert influence worldwide. How the US will be resetting its policy to regain the ground in coming months and years is a question that has no clear answer at this point in time.
Copyright Business Recorder, 2023