Weaponising the dollar will ultimately hurt America

The dollar is still king when it comes to global central bank reserves, but the current administration’s antagonistic policies is resulting in some countries trying to ditch the US currency.

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  1. Garry White

The dollar is the most important currency in the world because of Saudi Arabia. In the 1970s, the world’s largest oil producer agreed to sell its crude in the US currency and the “petrodollar” was born. The move boosted global demand for the dollar, cementing its status as the globe’s reserve currency. However, the US’s current aggressive treatment of rivals and allies alike means many countries are questioning whether the use of the dollar is now in their own interests. The Trump regime’s belligerence is resulting in countries turning their backs on the buck – and Russia is leading the de-dollarisation trend.

Its use in commodity markets and as a reserve currency boosts the need for other countries to hold dollars, resulting in high demand for US government bonds. US sanctions against Russia mean that Vladimir Putin has been looking at ways to ditch the dollar for some time and the US currency now represents just 22pc total reserves at the Central Bank of Russia (CBR), down significantly from the 46pc seen in the middle of 2017 and a third of the average held by other central banks. Instead, the CBR has been buying gold, in a move that was likely to have provided major support for the precious metal’s price last year. In 2018, the central bank bought 274 tonnes of bullion, spending around $11bn. As a result, gold now accounts for about 19pc of Russia’s foreign-exchange reserves, the highest level in almost 20 years.

It’s not just Russia that wants to turn its back on the dollar. Last year, the US unilaterally re-imposed oil and financial sanctions against Iran, with Treasury Secretary Steven Mnuchin noting that the Belgium-based Society for Worldwide Interbank Financial Communications (SWIFT) could get hit by sanctions if it provided services to Iranian banks blacklisted by Washington. SWIFT is a key global payment system in cross-border transactions and the differences of opinion over Iran highlighted just how much influence the US body politic has over the international financial system. This power has also been demonstrated in sanctions against Venezuela and Turkey. Indeed, US sanctions required countries such as India to seek waivers from Washington for the purchase of military equipment from Russia and oil from Iran. This forced a sovereign nation to go cap in hand to Washington to allow it to continue its everyday business because of a dispute in which it wanted no part. These waivers expire on 2 May and the move was undoubtedly unpopular in New Delhi and elsewhere.

So, it was no surprise when it was revealed this week that a number of Russian banks have now joined the Chinese upstart rival to SWIFT. The China International Payments System (CIPS) will provide a new easy transfer of funds between the two countries, the CBR said when it confirmed the move. Since oil is currently priced in dollars and energy is the most important Russian export, it’s actually very hard for Moscow to completely move away from using the US currency. However, China launched its own yuan-based oil contract 12 months ago and, although it is mostly used within China, it has taken trading volumes away from London and New York. It is far from being an international benchmark for crude prices, but both China and Russia have a strong interest in it being a success.

It’s not just Eastern rivals that see the benefit of de-dollarisation. An increasing antagonism with Western countries, which include threats of a full-blown trade war with Europe, has prompted US allies to reconsider their view too. In December, French President Emmanuel Macron said that dollar hegemony was “an issue of sovereignty” and he wanted Europe to be “less dependent” on the US currency. This echoed earlier comments from Jean-Claude Juncker. In his last State of the Union speech as European Commission President in September, he argued that it was an “aberration” that the European Union (EU) paid for more than 80pc of its energy imports in dollars when just 2pc of the oil and gas was imported from the US. He said the euro would now become an “active instrument” of EU sovereignty.

To his credit, President Macron accepted that the euro was not “a clear alternative” to the US currency yet and conceded that the bloc had failed “to make the euro as strong as the dollar”. With the euro’s structural issues clearly highlighted by the financial crisis and its fallout, this is clearly an understatement. Nevertheless, data released by the International Monetary Fund last week showed that the US dollar’s share of central bank currency reserves fell in the fourth quarter of 2018 to 61.94pc of the total. This was the third-consecutive quarter of falls – and the euro’s share of reserves grew to the largest in four years, at 20.69pc. The share of allocated currency reserves held in yuan also rose to 1.89pc, the highest since the IMF began reporting its share of central bank holdings in the fourth quarter of 2016.

Excluding political enemies from the global dollar system will remain a weapon that can be used at Washington’s whim. But the more the dollar is weaponised against individual countries, the more likely it will be that they will seek alternatives that will bypass the US currency. Although it will take some time for the dollar to be dethroned, current US policies could accelerate the greenback’s demise as the reserve currency of choice.

A version of this article appeared in Friday’s Daily Telegraph.

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