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Article: Currency Wars: Future Trends in a Changing Global Landscape . Currency warfare resulted from two or more countries escalating their currency depreciation policies in an attempt to boost their own competitiveness and foreign trade at the expense of other countries. The purpose of the devaluation is to intentionally reduce a country’s purchasing power. Effectively lowering the cost of exports and increasing the appeal of their own products to foreign consumers is what leads to the competitive devaluation. Therefore, causing their own economy to flourish more quickly. With floating exchange rates in place today, market forces mostly decide the value of currencies. One strategy would be to lower interest rates. Another is known as quantitative easing (QE), wherein a central bank purchases bonds or other assets on the market in bulk.
A world currency is any money that can freely be used or exchanged for another currency inside or outside the borders of the country that issues it.
The US dollar is primarily the most common currency for trade and other international activities, and serves as the principal reserve of the globe. Nonetheless, its predominance is called into doubt, particularly given the persistently shifting global tendencies. There are nations that are cautious about relying too much on the US dollar due to ongoing hostilities and U.S. sanctions. Furthermore, a strong US dollar is becoming more costly for emerging economies against a backdrop of rising interest rates, prompting some of them to trade in other currencies. Bolivia was the third South American nation to use the Chinese yuan to pay for imports and exports, following Argentina and Brazil, in July 2023.
DE-DOLLARIZATION- CHALLENGING THE HEGEMONY OF USA
United States of America enjoys the luxury of being able to control the world financial system, run government deficits without fear of repercussions, and create trillions of dollars out of thin air.
Due to this special advantage, the United States is also able to maintain low interest rates on its debt and offer its population a quality of life that would not be feasible otherwise. The dollar is used to hold nearly 60% of the world’s foreign exchange reserves.But for what length of time?
De-dollarization is the process of drastically reducing the amount of dollars used in international trade and financial operations, which lowers demand for the dollar among corporations, institutions, and national consumers. This will lessen the global finance market’s hegemony denominated in dollars, as lenders and borrowers from all over the world deal in dollars.
The subsequent decades saw success for America’s strong dollar program. However, during the late 1990s, two significant seeds—China’s economy and American wastefulness—started to sprout. America had changed from being the world’s greatest creditor nation to its largest debtor nation by the early 2000s, and the Federal Reserve started an aggressive monetary strategy that has persisted for the past 20 years.
After the financial crisis of 2008, China expressed its ambition to establish a new global financial system and argued that the United States was depreciating the dollar due to its massive debt accumulation and excessive money creation. The proposal of a new monetary system was greeted with indifference, with the notable exception of nations that were subject to U.S. sanctions, such as North Korea, Iran, Venezuela, and Russia. For most of the industrialised world, including America, the idea that anything might replace the dollar was unimaginable and bordered on blasphemy.
In addition to being the most often used currency for trade and other international transactions, the US dollar serves as the major reserve currency in the globe. Since oil is a vital commodity that all economies, large and small, depend on, and is priced in US dollars, the US dollar has dominated international trade for decades. This is due to more than just the fact that the US has the largest economy in the world. The majority of commodities are priced and exchanged in US dollars. But its primacy is in doubt, particularly in light of the continuing conflict between Russia and Ukraine. Everything changed when Russia invaded the Ukrainians. Along with sanctions, the United States and NATO allies (the West) cut off Russia’s access to the SWIFT dollar transfer system and froze its holdings of US dollars.
China saw an opportunity and encouraged much of the world to do the same. The race started looking for other options.
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“CURRENCY WARS: THE DOLLAR’S REIGN AT RISK OF REPLACEMENT”
We do wonder, “Why is Beijing attempting to establish the Renminbi as a worldwide currency?” A lot of people in China know the answer immediately: a first-class economy needs a first-class currency. Chinese authorities think that the Renminbi’s internationalization is a practical means of releasing the Chinese economy from the dollar’s sway. The Chinese currency has not yet been regarded as a leading hard currency, but the country’s economic situation is forcing it to do so. By October 2016, the currency had been included into the SDR basket, which has grown in importance in terms of the makeup of foreign exchange reserves.
After 1978, strategic planning helped China become the second-biggest economy in the world, behind the United States. China is a genuine threat to the US currency because it wants to be a dominant player in the global monetary system.
The Chinese government has long aimed for the yuan, its native currency, to have more influence in global banking. The pursuit of the yuan’s internationalization has taken numerous forms, the most recent of which was in connection with the IMF and the yuan’s inclusion in the “basket” of currencies supporting Special Drawing Rights.
China has become more interested in internationalizing its currency, particularly in the wake of the 2008 global financial crisis, which was mostly driven by the declining value of the US dollar. Given that China’s economy currently ranks second in the world, its currency should also enjoy widespread recognition. China is currently attempting to get its currency recognized as a worldwide currency in order to reduce US influence over the global economy and the unfairly exploited international monetary system, as well as to reduce the dangers associated with currency swings, particularly those resulting from the US dollar.
China’s currency, the Renminbi (sometimes called the People’s Currency), is divided into 100 Fen or ten Jiao. The Monetary Committee of the People’s Republic of China, which is the Central Bank of China’s commission, is in charge of the Renminbi.
As financial policies become more liberalized, there is increased likelihood that the yuan will fulfill the worldwide role one would anticipate from the currency of the biggest trade, manufacturing, and second-largest economies in the world. However, this SDR-focused approach has drastically changed in 2018 and has been replaced with one that focuses on the oil industry, the biggest commodity market in the world, where US dollar trade has long been prevalent. A new oil futures contract was introduced by China on the Shanghai International Energy Exchange (INE) during this break. Since its launch on March 26, 2018, the Shanghai oil futures contract has been widely accepted by the market.
As previously indicated, the world’s largest commodity market is the oil market, which is now valued at $14 trillion. The agreement reached in 1974 between the US and the House of Saud of Saudi Arabia stated that all oil purchases would be made in US dollars and that any surplus would be recycled by Saudi Arabia through US financial markets. This agreement is the source of the current US dollar oil trading system. Through this strategy, the United States was able to sustain its dollar hegemony well beyond the post-World War II financial settlement, which saw the IMF and World Bank emerge as the primary Bretton Woods institutions. The deal between the US and Saudi Arabia to only price oil purchases in US dollars prevented disaster.
At different points in time, there have been proposals to abandon oil trade in dollars. Contracts for the delivery of oil that are at least partially payable in euros have been successfully negotiated by the EU, and this may undoubtedly expand their significance in cross-border transactions. China can now demand that oil purchases be made in yuan (RMB) because it is now the largest oil importer in the world. Already, the majority of oil contracts between China and Russia are expressed in yuan; Iran, Iraq, Venezuela, and Indonesia also, to varied degrees, use this system when doing business with China and Russia.4 Yahya al-Ishaq, the chairman of the Iraqi-Iranian Chamber of Commerce, said the news agency Mehr in September 2018 that both nations are now using their own national currencies in addition to euro in bilateral trade.
For a number of reasons, including their need for Russian food, fertiliser, oil, and military hardware as well as their ability to use the Wagner Group to thwart domestic anti-insurgency initiatives, the BRICS nations and a large portion of the global south have been hesitant to cut their connections with Russia. Because financial institutions are based on trust, they cannot maintain their dominance if they are militarised.
As a result, in less than a year, nations all over the world found the guts to start candidly debating the development of substitute trade and settlement mechanisms as well as the reduction of their dollar reserves. The majority of the departing will take place in the dollar’s trading and settlement role, which is also where the dollar’s demand will decline more sharply.
In addition, over the course of the last year, BRICS nations have received a large number of new member applications. Notably, Saudi Arabia, Egypt, Turkey, and Algeria have all expressed interest in joining BRICS and have made statements on the formation of a BRICS currency to rival the dollar.
The oil markets are also exhibiting certain indications of dedollarization.One of the main factors influencing the price of oil globally is the value of the US dollar, which seems to be waning.
China, which demands that nations under sanctions, including Venezuela, Iran, and Russia, accept yuan as payment for oil, is exploring cross-border digital currency settlements with Thailand and the UAE. According to rumours, Saudi Arabia is already selling oil for yuan and exchanging those yuan for gold on the Shanghai exchange. The country is thinking of doing the same. Additionally, India purchases some Russian oil in UAE dirhams. The most straightforward approach—which is gaining traction—is bilateral agreements made in local currencies.
Cryptocurrencies are a new type of digital currency that is uncontrollable by the government, like Bitcoin. They have been appealing to those seeking alternatives to the dollar because of this.
Any abrupt decline in the demand for US dollars might have catastrophic effects on Americans. It might perhaps start a debt and money creation cycle that would shred society’s social fabric and cause a U.S. dollar crisis that would result in extremely high inflation, possibly even hyperinflation.
To put it briefly, any administration in the United States would eventually view these de-dollarization efforts as matters of national security.
Conclusion:
Dedollarization, the process of reducing reliance on the U.S. dollar in global trade and finance, poses significant implications for U.S. hegemony. Historically, the U.S. dollar has been the dominant global reserve currency, conferring substantial economic and geopolitical advantages to the United States. These advantages include the ability to borrow at lower costs, influence global financial systems, and impose economic sanctions effectively. However, recent trends suggest a gradual shift away from the dollar, driven by several factors. Key among them is the strategic intent of major economies like China and Russia to diminish their dependence on the dollar to insulate themselves from U.S. financial leverage. This is evidenced by the increasing bilateral trade agreements settled in local currencies, the establishment of alternative payment systems like China’s Cross-Border Interbank Payment System (CIPS), and the accumulation of gold reserves by various countries.
China’s yuan (CNY), in particular, is gaining traction as an alternative currency. The Belt and Road Initiative (BRI) and the internationalization of Chinese financial markets have facilitated wider acceptance of the yuan in global transactions. Moreover, the inclusion of the yuan in the International Monetary Fund’s Special Drawing Rights (SDR) basket underscores its rising stature in the global financial system.
Despite these developments, the U.S. dollar’s entrenched position is not easily dislodged. The dollar’s dominance is underpinned by the depth and liquidity of U.S. financial markets, the stability of U.S. institutions, and the widespread trust in the dollar as a store of value. Additionally, the inertia and network effects associated with the current dollar-based system present substantial barriers to a rapid transition.
Nevertheless, the persistent efforts towards de dollarization reflect a growing multipolarity in global finance. If the trend accelerates, the U.S. may face diminished economic influence and reduced capacity to exert soft power through financial means. Simultaneously, the yuan’s ascendancy could mark the beginning of a more diversified and potentially more stable global currency system.
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In conclusion, while de dollarization challenges the hegemonic status of the U.S. dollar, the process is gradual and complex. The U.S. is at risk of a relative decline in its financial dominance, but a complete replacement of the dollar by the yuan or any other currency remains a distant prospect. The evolving dynamics suggest a future where multiple currencies share the stage, reflecting a more balanced global economic order.
