Paris, 27 April 2023 (GNP): The US dollar, as the leading global currency, has long been the preferred form of payment for investors as the most important global currency but that status is now coming under a mounting threat.
In terms of international trade and worldwide banking, the US dollar has mostly been utilized for everything from ordering airplanes to purchasing oil to issuing debt. However, a few emerging nations, especially China, have taken the lead in the fight against the overuse of the US Dollar.
Paola Subacchi, professor of International Economics at the Global Policy Institute at the Queen Mary University of London said, “In many developing countries there is a desire to be less dependent on the dollar, particularly on the trade side”.
One point emerged from our discussion: are we moving towards a multi-currency international monetary system? #rmb remains constrained but its use in trade finance is increasing: the share of #rmb in global payments has doubled yoy: 4.5% in March 2023 (Swift) https://t.co/bXheoYK9pI
— Paola Subacchi (@PaolaSubacchi) April 16, 2023
During a visit to China in April, Brazilian President Luiz Inacio Lula da Silva questioned before signing a deal with Beijing to provide business contracts valued in yuan, “Why all countries are forced to trade based on the dollar”
Additionally, Bangladesh recently disclosed that it paid France’s TotalEnergies for a cargo of liquefied natural gas with Chinese yuan and used its own currency to pay Russia for a nuclear power project.
Over the past ten years, the Yuan has slowly but steadily become more prevalent in international trade, but it is still far from being a major player in international transactions.
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Despite this, some analysts contend that the US dollar is overrepresented in comparison to the country’s economic might. Despite the US economy making up a lesser portion of global GDP than other major economies, the dollar dominates international payments, foreign exchange trading, and the Special Drawing Rights (SDR) currency basket, accounting for 41.1%, 88%, and 41.73%, respectively.
On the other hand, just 2.19% of global payments, 3.5% of global FX transactions, 2.76% of central bank reserves, and 12.28% of the SDR basket are made using the currency of China.
Despite China’s about 18% share of global GDP, the Yuan still has a limited reach, although the nation has been making efforts to boost its usage in international trade. One such initiative was the introduction of yuan-denominated trade settlements ten years ago, which assisted in boosting the usage of the currency abroad.
While India settles the majority of its oil imports from Russia in non-dollar currencies, Saudi Arabia has also toyed with the concept of pricing its oil in Yuan.
Following the US Federal Reserve’s tightening of monetary policy, India’s commerce secretary Sunil Barthwal recently said that India will provide its currency as a substitute for trade to nations lacking in dollars.
Despite these changes, the dollar remains the world’s reserve currency, and its grip on the financial system could only loosen if more nations began trading in other currencies and cut their reliance on the US dollar.
America may experience a reckoning unlike any other if the US dollar’s special position begins to erode. This is because American politicians have grown accustomed to spending without regard for deficits, and the Federal Reserve has employed tremendous balance sheet expansion to prevent a number of financial crises.
