The ‘dollar king’: criticized and challenged, but far from dethroned

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It is very difficult to do without the dollar when buying barrels of oil or planes and issuing debt on international markets, for example. Dollar banknotes John Guccione/Pexels A symbol of the economic power of the United States, the dollar is far from being dethroned as the “king” of currencies, despite criticism and challenges from those who question its hegemony in world trade and finance. It is very difficult to do without the dollar when buying barrels of oil or planes and issuing debt on international markets. There are more and more appeals and initiatives that defend the reduction of dependence on the American currency, such as the one made by Brazilian President Luiz Inácio Lula da Silva on his recent trip to China. “Every night I ask myself why all countries are obliged to do their trade pegged to the dollar? (…) Today a country needs to run after the dollar to be able to export when it could export in its own currency”, stated Lula. The statement by the President of Brazil came shortly after the signing of an agreement with China that will make commercial transactions possible in Yuan and Reais. In China, Lula defends replacing the dollar in commercial transactions between countries. Bangladesh recently announced payment in yuan for a nuclear power plant to Russia and China canceled a delivery of liquefied natural gas in its own currency to the French group TotalEnergies. “There is a desire to be less dependent on the dollar in many developing countries, in particular for trade,” Paola Subacchi, professor of international economics at Queen Mary University of London, told AFP. “These countries realize that the dollar is very dominant, especially China,” she added. Economic Sanctions The “exorbitant privilege” of the dollar, to use the expression of former French President Valéry Giscard d’Estaing (1974-1981), gives the United States competitive advantages in trade and in financing its deficits. At the same time, developing countries are affected by US currency movements, which set the prices of their exports and imports. Interest rates in the United States have, in turn, consequences for the cost of dollar-denominated debt. And the dollar is also a weapon used by the US government to gain geopolitical advantage. When Washington imposes economic sanctions on a country, the US government forces foreign companies using the dollar to abide by its restrictions or face sanctions. “The United States uses the hegemony of the dollar to adopt sanctions against Russia. Others are concerned about the possibility of sanctions and decide to opt for other currencies”, summarized to AFP Larry Yang, chief economist at the investment company First Seafront, from Shenzhen ( China). French President Emmanuel Macron expressed concern about the “extraterritoriality of the dollar” when talking to journalists after returning from a recent visit to China. Understand what makes the dollar go up or down No competitors The second largest economy in the world and a great political rival of the United States, China has been trying to internationalize its currency for years. But the yuan lacks one important element that the dollar has: free convertibility. Chinese currency is largely regulated by the Beijing government. “Today no currency can compete with the dollar”, says Subacchi. Central bank reserves show a progressive decline in the dollar’s share in their composition, which dropped from 71% of the total in 1999 to 59% in 2021, according to a report published last year by the IMF. The drop was caused by the fact that “small currencies” (other than the euro, yen or sterling) have increased their participation to 10% of the total in 2021. The American currency currently represents 42% of the currencies used for international trade, against 33% for the euro, 6% for the British pound, 5% for the yen and just 2% for the yuan, according to the latest data from the Swift international payments system. “Can we progressively move towards an alternative currency? Yes”, considers Alessandra Ribeiro, economist at Brazil’s Tendências Consultoria, based in São Paulo. “But the whole structure that the United States offers in terms of security and institutionality must be proposed by the others”, she adds, before citing a stable central bank and stable governance, clear inflation targets and some protection for investors.

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