As we move from a unipolar to a multipolar world, we witness a flux affecting all aspects of world politics and economy. The power configuration in international relations is also reflected in the international monetary system.
The US dollar has long been the global reserve currency, serving as a cornerstone of international trade and finance for decades.
However, in recent years, the dollar’s dominance has been challenged by a number of factors, including growing international economic competition, shifting geopolitical power dynamics, and changes in global financial markets. As a result, the US dollar has experienced a decline in value, raising concerns about its long-term stability and future role in the global economy. It is, therefore, necessary to analyze the impact this may have on the US dollar hegemony and power relations in the international monetary system and how it will affect the developed and developing countries, particularly the Global South.
US dollar has long played an oversized role in global markets, far outperforming the US’s share in global trade, international bond issuance, and cross-border borrowing and lending. Among the main reasons for the dollar’s decline in recent years has been the rise of economic competition from emerging markets. There are undercurrents and efforts particularly by the BRICS nations led by China, that indicate a slow yet certain erosion of the US dollar’s and a subtle shift towards a multipolar currency order. Surging gold prices and falling dollar reserves are seen as clear evidence of this shift.
Another factor contributing to the dollar’s decline has been the United States relative decline in power and influence, particularly in the wake of the global financial crisis of 2008 led to a greater willingness on the part of other countries to challenge American economic and political dominance. This has been reflected in efforts by countries such as China, Russia, Argentina, Brazil, Pakistan, Saudi Arabia, and Iran among others to reduce their dependence on the US dollar in international transactions and to promote the use of alternative currencies or payment systems.
Although it may still be early to tell, a sustained effort by the Global South to reduce its dollar dependence is becoming increasingly evident. Under the fast-changing emerging global political and economic changes, is it possible for the Western powers to prevent, or at least slow down the pace of further fragmentation at a time of high inflation, geopolitical tensions, the impact of the COVID-19 pandemic, the war in Ukraine and the sanctions on Russia?
Political analysts believe the increased reliance on financial sanctions by the U.S.A as a foreign policy tool has led to the search for alternate currencies for trading. While the true effectiveness of these sanctions is still debatable, the measures have led Russia, as well as other countries in the Global South, to seek potential alternatives and lead to the slow but steady rise of alternative financial infrastructures, eventually pushing countries to seek different currencies, including their own.
The determination displayed by China to offer alternatives to the dollar deserve close attention as it has large internationally active banks, created its own clearinghouse for cross-border transactions, and embarked on a campaign to encourage broader international use of its currency.
The Global South’s response to the Russian invasion of Ukraine clearly manifested the inefficacity of the overuse of sanctions. As the US let controls restrict Russia’s access to the US dollar coupled with Western sanctions severely damaged the Russian economy and saw nearly half of its foreign currency reserves frozen and major banks removed from the interbank messaging service SWIFT. This forced Moscow to adopt a broader use of the Chinese Yuan. Putin called on its partners in Asia, Africa, and Latin America to adopt the Chinese RMB for cross-border payments. State-owned Russian gas giant Gazprom signed agreements with China National Petroleum Corporation to settle payments for Russian gas supplies to China in Roubles and Yuan. Other top Russian companies also started to borrow in Yuan in the bond market. In October, the Yuan surpassed the US dollar for the first time to become the most traded foreign currency on the Moscow exchange.
Then came Lula, wondering ‘why every country needs to trade in the dollar’ and ‘who decided it was the dollar after the disappearance of the gold standard?’ The BRICS have long aspired to de-dollarize, but this trend is spreading. Lately, ASEAN finance ministers and central bankers are also considering dropping foreign currencies in exchange for local ones. The current state of the Western-led international payments infrastructure is represented by SWIFT and US Clearing House Interbank Payments System (CHIPS). Countries and banks under sanctions of the UN or the West that are banned from SWIFT have to find other ways of communicating with foreign counterparts instead of relying on CHIPS for settling cross-border payments that could entail risks for countries with a difficult relationship with the US.
Increasing the international use of any country’s own currency against the established US dollar, however, entails several challenges. The first is that other countries should be willing to accept payment in that currency. The second is that it should be possible to trade the currency at a reasonable cost. The People’s Bank of China (PBOC) has sought to achieve this by signing a number of bilateral swap agreements with foreign central banks to provide liquidity for direct trades and so remove the need to purchase US dollars first. The third is that there should be a reliable mechanism for transferring payments between domestic and foreign entities, which is where a Chinese clearinghouse comes in. In 2015 the PBOC launched CIPS, an RMB-based interbank payment system to serve as an alternative to both SWIFT and Western clearinghouses. It is divided into direct participants who maintain an account in the system, and indirect participants who deal with it via the former.
China is an evident candidate due to its general opposition to US foreign policy particularly those who do not subscribe to the US worldview and hegemony.
Russia doing international business through Chinese financial institutions is helping them circumvent US sanctions and weaken the West’s coalition. China already constitutes a major market for Russian energy exports, and the RMB can be used for purchases of merchandise and material, pay for infrastructure projects, and buy government bonds. In fact, this is already happening with the help of smaller, regional Chinese banks without much exposure to the global financial system, so other countries could see this as insurance against future conflicts with the West.
According to UNCTAD, China is also the first country in terms of foreign direct investment outflows and second in terms of inflows. If foreign importers were increasingly encouraged to settle payments in RMB and borrow Yuan-denominated loans, particularly those participating in the Belt and Road Initiative, CIPS, and China’s swap lines could become an increasingly vital financial infrastructure for many countries. President Xi said during a visit to Saudi Arabia in December 2022 that there should be a new paradigm for energy cooperation, and he called for boosting the role of the Yuan as a currency for trading in oil and gas. The Shanghai Petroleum and Natural Gas Exchange platform is being fully utilized for Yuan settlement in oil and gas trading.
Argentina said in late April that it would start to pay for Chinese imports in Yuan rather than US dollars and has activated the currency swap arrangement with China. Brazil has begun to accept trade settlements and investments in Yuan, with an agreement reached between central banks and the appointment of a Yuan-clearing bank and access to the Cross-border Interbank Payment System, the China equivalent to the international financial messaging service Swift.
Similarly, Pakistan is now using the Yuan to buy Russian crude oil, with a test cargo of 750,000 barrels that arrived in the first week of June 2023. Several more cargoes of crude oil from Russia are underway. The agreement for the construction of the crucial US Dollar 9 billion Main Line 1 railway project is also being negotiated to be settled in Yuan.
Pakistan is also exploring larger barter trade arrangements and currency swap agreements with other countries including Iran and Afghanistan.
Bangladesh and Russia agreed to use the Yuan to settle payment for a nuclear plant that Moscow is building there. Dhaka had been unable to pay Moscow using US dollars after Russia was banned from accessing the Swift international money transfer system last year. The Iraqi central bank said in February that it would allow for private sector imports to be paid off in Yuan and that the bank would provide the Chinese currency to Iraqi lenders to pay their Chinese counterparts. The Bank of Thailand and the People’s Bank of China have held talks over additional cooperation to encourage businesses to use Yuan-baht settlement for trade between the two countries. China and Thailand renewed their Yuan-baht Bilateral Currency Swap Arrangement in January 2021.
In addition to structural factors, changes in global financial markets have also contributed to the dollar’s decline. The increasing availability and accessibility of new financial instruments, such as cryptocurrencies and digital payment platforms, has made it easier for individuals and businesses to conduct international transactions outside the traditional banking system, potentially reducing demand for the US dollar. Similarly, the growth of global financial markets has led to greater competition among currencies, as investors and traders seek out the most profitable and stable assets, further eroding the dollar’s position as the preeminent reserve currency. As Western nations levy harsh sanctions against Moscow, Many capitals including Beijing are worried that they could be next. Given the current fraught geopolitical climate, China hopes that reducing its reliance on the dollar will help act as a buffer against the threat of U.S. sanctions.
In conclusion, the decline of the US dollar as the global reserve currency is a complex and multifaceted phenomenon, driven by a range of structural, geopolitical, and financial factors.
While the dollar remains a dominant force in the global economy, its position is increasingly vulnerable to competition from emerging markets, shifting power dynamics, and changes in financial markets.
The long-term viability of the US dollar as the global reserve currency is thus by no means assured and will depend on a number of factors, including the ability of the US to maintain its economic and political dominance, the emergence of new technologies and financial instruments, and the willingness of other countries to challenge the dollar’s supremacy.
the Author is a retired diplomat with over 37 years of distinguished service in the Foreign Service of Pakistan. During her career, she held key positions, including Ambassador to China, the European Union, Ireland. She also served as Deputy Head of Mission to China and Denmark. With expertise in various areas, she held significant roles at the Foreign Office, including Additional Foreign Secretary for America’s and Director General Policy Planning.
In addition to her diplomatic career, she is actively engaged as Vice Chair of the Council on Global Policy and a member of the Board of Directors of First Women Bank. She serves as an advisor to the China Study Center at ISSI and Kestral International. Furthermore, she is a prolific writer, contributing regularly to esteemed magazines and newspapers. As an accomplished author, she has published several books, including “Magnificent Pakistan” and “Pakistan-China-All Weather Friendship.” Her dedication and expertise continue to impact the field of international relations. She tweets @AmbNaghmanaHash.