2024-10-28 06:23:00
It’s been 80 years this year that the American dollar has dominated international trade, a hegemony that is increasingly contested.
The reign of the dollar officially began in July 1944, with the Bretton Woods Accords, named after the town in New Hampshire where representatives from 44 countries met to pick up the pieces of a financial system damaged by two wars. global.
The United States, whose economy was flourishing, had no difficulty in imposing its dollar as the reference currency on a Europe ruined by the war and on the rest of the world. From these 1944 discussions also emerged the World Bank and the International Monetary Fund, organizations which still today have the responsibility of maintaining the stability of the international financial order.
Eighty years later, the US dollar still dominates the global economy. But its influence is eroding, that’s a fact. It represented 71% of international currency reserves in 2000 and this share had fallen to 58% in 2022. Even if the dollar is losing ground, it remains the cornerstone of the financial system1.
This supremacy has often been called into question, today more than ever. Replacing the dollar in international trade was on the agenda of the first meeting of the countries of the new trade bloc called BRICS last year, and was still on the agenda of their second meeting which took place in Russia last week.
BRICS, for Brazil, Russia, India, China and South Africa, welcomed four new members last year, Egypt, Ethiopia, Iran and the United Arab Emirates, and more than thirty other countries wish join them. Their goal: to establish a new, fairer international order, which can be translated as less dependent on the United States and the American dollar.
For Russian President Vladimir Putin, whose country was banned from the interbank payments system after the invasion of Ukraine and is subject to unprecedented financial sanctions, this is a major problem.
Russia has done quite well so far to minimize the impact of its banning, thanks to its allies who continue to buy Russian oil, such as China and India. But transactions are becoming more and more complex and this alternative system can hardly be maintained in the long term.
Last week, Vladimir Putin achieved the feat of bringing together representatives of 32 countries, which account for half of the world’s population, at his home to advance his project.
The big guns were there. The Chinese President, Xi Jinping, and the Indian Prime Minister, Narendra Modi, made the trip, as did the UN Secretary General. The presence of António Guterres in a forum convened by a country that takes no account of UN resolutions is still astonishing.
On the political level, the meeting was a success for the Russian president, who showed that he still has friends, and important friends at that. For the rest and on the question of strengthening trade between the members of this new trading bloc which could lead to a common currency, there has been no progress.
It’s difficult to imagine that such a diverse bloc of countries could agree to choose a common currency that would have neither the stability, nor the security, nor the ease of exchange of the American dollar. Logically, this new common currency should be that of China, which is by far the largest economic power in the group. Its currency, the yuan or renminbi, is increasing its importance in international trade.
China carried out 53% of its international transactions in renminbi in July this year, compared to 40% in July 2021, the Financial Times. The isolation of Russia by the bloc of Western countries and the multiplication of sanctions which affect more or less all countries that trade have a lot to do with the growing popularity of the use of the Chinese currency.
From there to a significant number of countries that want an alternative option to the American dollar relying on China and its currency, there is a step, insurmountable in the current state of things.
As National Bank analyst Angelo Katsora has already pointed out, “while holders of US dollars may be exposed to risks linked to possible sanctions, those holding assets in yuan could be even more vulnerable” ‘they displease the Communist Party.’
As the Chinese political regime still seems to have a long life ahead of it, the yuan does not have much chance of establishing itself internationally.
We will continue to talk more and more about dedollarization, because it can happen, but it is not for tomorrow. In recent history, the last time a dominant currency was replaced was when the British pound gave way to the US dollar in 1944.
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