Breaking the dominance of the dollar.. Is it the solution to the global economic crises?

The dominance of the dollar over the global economy has begun to lose its momentum since the start of the war in Ukraine and Western sanctions against Russia, as many emerging countries want to avoid excessive dealings in the US currency, and this may benefit the Chinese yuan in the face of this dominance.

The concern of many countries about America's hegemony over the global financial system and its ability to make it a weapon against it, made it test other alternatives to limit the dominance of the dollar. At a time when the United States and other Western countries imposed economic sanctions on Russia in response to its war on Ukraine, Moscow and the Chinese government cooperated to reduce dependence on the dollar and establish cooperation between their financial systems.

The United States is currently facing a debt crisis, and if it defaults, this will threaten the dollar's position globally as a payment or reserve currency, which makes the government and companies forced to pay their international bills in another currency.

The French newspaper "La Tribune" published a report in which it discussed the de-dollarization of the global economy as a struggle against the military and economic hegemony of the United States.

According to the report, the issue of dollar hegemony is viewed today from the perspective of competition between China and the United States for global leadership, and above all through the trade war that has intensified since Donald Trump came to the presidency, and the issue has gained greater momentum since the Russian war on Ukraine, which led to a revival of What looks like a new cold war between emerging and developed countries.

Stay away from western payment systems

The report quoted Indonesian President Joko Widodo as saying in Jakarta at the end of last March - during the "Association of Southeast Asian Nations" summit - that "it is necessary to move away from Western payment systems to protect our transactions from potential geopolitical repercussions."

The Association of Southeast Asian Nations includes 10 countries representing more than 664 million people, as the Jakarta summit discussions focused on how to reduce dependence not only on the dollar, but also on the euro, yen and pound sterling, and the adoption of a financial system that encourages credit cards issued by local banks instead. Those of the "Visa" and "MasterCard" networks.

In addition, the use of the yuan instead of the dollar has increased among emerging countries in recent months, especially with regard to raw materials of which China is the largest importer in the world, Russian and Saudi oil, UAE gas, or even Brazilian or Argentine soybeans.

The report pointed out that these options do not negate the continued dominance of the US currency. The dollar is still the most widely used international currency in paying global bills and financing international trade.

Safe Harbor Requirements

The endeavor of emerging countries that are not allied with the West to develop and protect their trade, reduce transaction costs and diversify their foreign currency reserves without using the dollar is another matter. Because ending "dollarization" may not be the economic and financial solution that some assume.

In fact, if the United States, thanks to its currency, can expand its deficit funded by other countries through its purchases of dollars, then this “exorbitant privilege” results from the fact that the dominant currency requires greater responsibilities, so when global crises arise, all countries rush to the dollar as a haven. safe.

Strong growth in demand for the dollar leads to a significant rise in its value, which reduces the value of assets held by the United States outside the country and increases assets owned in the United States by foreign countries.

Here we wonder: Is China ready to accept such losses? To take advantage of this privilege, it will have to accept the floating of the yuan, that is, its value becomes fixed through supply and demand in the foreign exchange market, and it loses direct control over the exchange rate, and this change is an option that the Chinese Communist Party rejects because it would deprive it of the powers to control the country's economy.

The problem of Chinese loans

The report stated that there is another indication that China is not seeking to give the yuan a dominant position, which is its debt management towards poor countries. Since 2000, Beijing has spent $240 billion cumulatively to save 22 troubled countries, which caused panic to many countries, led by the United States. United States, to see that China has not committed itself to restructuring the debts of many countries, especially in Africa, because the dominant currency must guarantee financial liquidity, especially during periods of crisis, because in the event of a dollar shortage, foreign central banks have no other choice but to tighten their monetary policies. sharply to avoid a rapid depreciation of its currency that hurts local economies.

This is why the Federal Reserve has doubled since the financial crisis of 2007-2008 through "swap" agreements with major central banks around the world. This system, which provides for the exchange of currencies between two central banks, makes it possible to obtain liquidity in different currencies from the issuing institutions of each.

China also concluded swap agreements with the central banks of 49 countries between 2009 and 2020, including Nigeria and Britain, and these liquidity facilities aim first to facilitate trade and investment in a bilateral framework, by reducing the cost of volatility of local currencies against the green currency, while avoiding the political disadvantages of The dollar has transcended regional borders.

The report concluded by saying that Beijing - if it intends to use its currency to strengthen its presence in the global economy - must maintain and increase its market share in its trade war against the United States, and not in the desire to make the yuan a dominant currency.