Should the world ditch the “mighty” US dollar?

They say when America sneezes, the whole world catches a cold. Increasingly these days, there are efforts by many countries to ensure that the US’ cold remains within its borders.

The stranglehold of the dollar on international trade is facing a stiff challenge, as the world stands at a crossroads, one leading to the continued use of the dollar, one to a “trade with what you like” world.

Talks on de-dollarization have been gaining traction in the global economic sphere due to the pinch economies have been having feeling because of the spread of America’s economic cold. The American economy has been experiencing uneven growth, with an uncertain forecast since the pandemic.

The Federal Reserve Bank has been tightening monetary policy, hiking interest rates since March 2022 after the government’s COVID-19 economic relief programmes pumped money into the economy and heated up inflation.

The sluggish performance of America’s economy has had a ripple effect on international markets, harming the performance of most global economies. During the Feds’ rate hikes, financial instruments like bonds and stocks delivering negative returns causing huge losses for many economies that are invested in international markets. A global loss which has led to a bulb moment for many regional organizations and political bodies.

A strong US dollar, at the levels seen in recent times thanks to the Feds’ hikes, is bad news for countries in terms of US-dollar denominated debt as well as oil prices, a commodity which is transacted globally in the greenback. Besides fighting inflation and defending their currencies, other central banks have also had to hike their rates to stem capital outflows as investment has streamed in the direction of the stronger US dollar.

With Russia’s invasion of Ukraine worsening the inflationary pressures that were already on global food and fuel prices due to the pandemic supply constraints, more countries are eager to move away from a reliance on the US dollar.

Currently the share of the US dollar reserves held by central banks is at 58%, its lowest level in 25 years during the fourth quarter of 2020, according to the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) survey. Some analysts say this partly reflects the declining role of the US dollar in the global economy, in the face of competition from other currencies used by central banks for international transactions. If the shifts in central bank reserves are large enough, they can affect currency and bond markets.

“During periods of US dollar weakness against major currencies, the US dollar’s share of global reserves generally declines since the US dollar value of reserves denominated in other currencies increases,” the survey said.

Following the end of the Second World War, 44 western countries gathered at Bretton Woods and anointed the US dollar as the world’s principal reserve currency. It was pegged against gold at an exchangeable rate of $35 an ounce. However, in 1971 the dollar was decoupled due to insufficient US gold reserves rendering the dollar fiat money. The reduction in the amount of US dollars held in reserve banks has been declining due to the trading in native currencies by nations like China and India.

One of the increasingly dollar-aggrieved blocs, BRICS, a political and economic grouping of Brazil, Russia, India, China and South Africa, met in South Africa last week where de dollarisation was on top of the agenda.

All eyes were on the summit because of the presence Russia and China, two major contenders for global power who have expressed their opposition to the US’ global economic dominance. BRICS represents about a quarter of the global economy and accounts for 41.9% of people on Earth. More countries, many of them with similar opposition to the US dollar’s global dominance, have asked to join BRICS.

According to analysts the onslaught against the dollar is a direct move to challenge a unipolar world and the best place is to start is by replacing the dollar as a global trading currency.

Speaking during the summit, President of South Africa Cyril Ramaphosa said that the economic muscle wielded by BRICS is too much of a force to be ignored. Ramaphosa further said that despite the economic progress made by BRICS, international organizations which are controlled by the U.S are not cognisant of this, which creates an uneven playing ground.

“Total annual foreign direct investment into BRICS countries is four times greater than it was 20 years ago. However, the new wave of protectionism and the subsequent impact of unilateral measures that are incompatible with WTO rules undermine global economic growth and development,” he said.

For Russian president, Vladimir Putin, the fight against de-dollarisation is a national urgency. Since his invasion of Ukraine last February, Putin, his ministers and his allies have frequently spoken about the need for a multipolar world and the dangers of the greenback’s dominance.

The Russian hard-man hailed de-dollarisation, saying that the US dollar has become a global threat to the stability of economies due to the constant Fed rate hikes.

“The US dollar is losing its global role in an objective and irreversible process,” Putin told the BRICS summit via a virtual link-up, as the ICC has issued an international warrant for his arrest.

“De-dollarisation is gaining momentum and members of the group of major emerging economies are seeking to reduce their reliance on the greenback in mutual transactions.”

The US has also been accused of “weaponising” the dollar, through the use of sanctions against enemy states. America’s sanctions are infamous for targeting persons, entities and countries. The power of the dollar as a weapon is by targeting individuals through their payments flowing through a US bank or the American payments system which provides the necessary nexus for the U.S. to prosecute the offender or act against its American assets.

Sanctions have had crippling effects on some economies and have proved an effective weapon for the US and its allies over the years.

However, some analysts believe the latest campaign against the dollar will not amount to anything. During a recent media briefing, International Monetary Fund (IMF) analysts said de-dollarization is just a pipe dream as the US still amounts for the majority of the global foreign exchange reserves. The analysts are of the view that offsetting de-dollarization would require an overhaul of the global financial system as we know it and would threaten its stability.

“Despite major structural shifts in the international monetary system over the past six decades, the US dollar remains the dominant international reserve currency,” the analysts said.

Locally, monetary policy authorities are equally dismissive.

Speaking to Mmegi in a recent briefing, Bank of Botswana governor, Moses Pelaelo said that prevailing beliefs about the collapse of the dollar are to be expected since the world is fragmented and thus all parties would want to push their narrative. Pelaelo however said that as things stands there is no tangible movement on de-dollarisation.

“I think it’s important to understand that some of these sentiments and issues about de-dollarisation have to be proven by the facts on the ground in terms of the reserve currency and exactly what’s happening,” he said.

“But the Special Drawing Rights frameworks remains what it is and the dollar obviously continues to be the dominant or reserve currency.

“Of course, given what’s happening globally and particularly the geopolitical tensions and issues of that nature, you would expect those kind of sentiments to be happening.”

The Bank’s Director of Financial Markets Department, Lesego Caster Moseki, told Mmegi that the latest campaign against the dollar is yet another attempt in a long line of efforts to unseat the US dollar. He said previous attempts and sentiments against the greenback had not been successful because of the integrated global trading systems that rest on the bedrock of the issuance of the American dollar.

“That’s a very topical issue in the geopolitical space that because of this geopolitical tensions, a lot of people are looking at whether they could find an alternative for the dollar.

“This is not coming for the first time; it has happened many times before.

“But the fact of the matter is that the dollar remains the dominant currency in the global financial markets. “The US itself is the major issuer in terms of investment instruments or debt and the US companies are the dominant companies in many indices, if you look at the MSE global equity indices, the Bloomberg indices, the dominant issuers are in dollars.”

For Botswana, de-dollarisation would be a non-starter, as the US is the largest market for the country’s primary economic commodities – diamonds and tourism. Both are priced in US dollars and their performance, to varying extents, depends on the health of the American consumer.

But for BRICS members and those on the organisation’s application waiting list, the world would be a better place without the US dollar’s dominance.