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Suddenly Everyone Is Hunting for Alternatives to the US Dollar

Business

Tired of a too-strong and newly weaponized greenback, some of the world’s biggest economies are exploring ways to circumvent the US currency.

Smaller nations, including at least a dozen in Asia, are also experimenting with de-dollarization. And corporates around the world are selling an unprecedented portion of their debt in local currencies, wary of further dollar strength.

No one is saying the greenback will be dethroned anytime soon from its reign as the principal medium of exchange. Calls for “peak dollar” have many times proven premature. But not too long ago it was almost unthinkable for countries to explore payment mechanisms that bypassed the US currency or the SWIFT network that underpins the global financial system.

Now, the sheer strength of the dollar, its use under President Joe Biden to enforce sanctions on Russia this year and new technological innovations are together encouraging nations to start chipping away at its hegemony. Treasury officials declined to comment on these developments.

“This will simply intensify the efforts in Russia and China to try to manage their part of the world economy without the dollar,” said Paul Tucker, a former deputy governor of the Bank of England in a Bloomberg podcast.

Writing in a newsletter last week, John Mauldin, an investment strategist and president of Millennium Wave Advisors with more than three decades of markets experience said the Biden administration made an error in weaponizing the US dollar and the global payment system.

“That will force non-US investors and nations to diversify their holdings outside of the traditional safe haven of the US,” said Mauldin.

Bilateral Payments

Plans already underway in Russia and China to promote their currencies for international payments, including through the use of blockchain technologies, accelerated rapidly after the invasion of Ukraine. Russia, for example, began seeking remuneration for energy supplies in rubles.

Soon, the likes of Bangladesh, Kazakhstan and Laos were also stepping up negotiations with China to boost their use of the yuan. India began talking up more loudly the internationalization of the rupee and just this month, started securing a bilateral payment mechanism with the United Arab Emirates.

Progress however appears to be slow. Yuan accounts haven’t gained traction in Bangladesh for example due to the nation’s wide trade deficit with China. “Bangladesh has tried to pursue de-dollarization in trade with China, but the flow is almost one-sided,” said Salim Afzal Shawon, head of research at Dhaka-based BRAC EPL Stock Brokerage Ltd.

A major driver of those plans was the move by the US and Europe to cut off Russia from the global financial messaging system known as SWIFT. The action, described as a “financial nuclear weapon” by the French, left most major Russian banks estranged from a network that facilitates tens of millions of transactions every day, forcing them to lean on their own, much smaller version instead.

That had two implications. First, the US sanctions on Russia stoked concern that the dollar could more permanently become an overt political tool — a concern shared especially by China, but also beyond Beijing and Moscow. India, for example, has been developing its own homegrown payments system that would partly mimic SWIFT.

Second, the US decision to use the currency as part of a more aggressive form of economic statecraft puts extra pressure on economies in Asia to choose sides. Without any alternative payments system, they’d run the risk of being compelled into compliance with, or enforcement of, sanctions they may not agree with — and losing out on trade with key partners.

“The complicating factor in this cycle is the wave of sanctions and seizures on USD holdings,” said Taimur Baig, managing director and chief economist at DBS Group Research in Singapore. “Given this backdrop, regional steps to reduce USD reliance are unsurprising.”

Just as officials across Asia are loath to pick a winner in US-China tussles and would prefer to keep relations with both, the US penalties on Russia are pushing governments to go their own way. Sometimes the action takes a political or nationalist tone — including resentment of Western pressure to adopt sanctions on Russia.

Moscow looked to convince India to use an alternative system to keep transactions moving. Myanmar’s junta spokesman said the dollar was being used to “to bully smaller nations.” And Southeast Asian countries pointed to the episode as a reason to trade more in local currencies.

“Sanctions make it more difficult – by design – for countries and companies to remain neutral in geopolitical confrontations,” said Jonathan Wood, head of global risk analysis at Control Risks. “Countries will continue to weigh economic and strategic relationships. Companies are caught more than ever in the crossfire, and face ever more complex compliance obligations and other conflicting pressures.”

It’s not just the sanctions helping to accelerate the de-dollarization trend. The US currency’s rampant gains have also made Asian officials more aggressive in their attempts at diversification.

The dollar has strengthened about 7% this year, on track for its biggest annual advance since 2015, according to a Bloomberg index of the dollar. The gauge reached a record high in September as dollar appreciation sent everything from the British pound to the Indian rupee to historic lows.

Huge Headache

The dollar’s strength is a huge headache for Asian nations who’ve seen prices of food purchases soar, debt-repayment burdens worsen and poverty deepen.

Sri Lanka is a case in point, defaulting on its dollar debt for the first time ever as a soaring greenback crippled the nation’s ability to pay up. Vietnamese officials at one point blamed dollar appreciation for fuel-supply struggles.

Hence moves such as India’s deal with the UAE, which accelerates a long-running campaign to transact more in the rupee and to set up trade settlement agreements that bypass the US currency.

Meanwhile, dollar-denominated bond sales by non-financial companies have dropped to a record low 37% of the global total in 2022. They’ve accounted for more than 50% of debt sold in any one year on several occasions in the past decade.

While all these measures may have a limited market impact short term, the end result may be an eventual weakening of demand for the dollar. The Canadian dollar and Chinese yuan’s shares of all currency trades, for instance, are already slowly edging higher.

Technological progress is another factor facilitating efforts at moving away from the greenback.

Several economies are chipping away at dollar use as a by-product of efforts to build new payment networks — a campaign that pre-dates the surging greenback. Malaysia, Indonesia, Singapore and Thailand have set up systems for transactions between each another in their local currencies rather than the dollar. Taiwanese can pay with a QR code system that’s linked with Japan.

All-in, the efforts are driving momentum further away from a West-led system that’s been the bedrock for global finance for more than half a century. What’s emerging is a three-tier structure with the dollar still very much on top, but increasing bilateral payment routes and alternative spheres such as the yuan that seek to seize on any potential US overreach.

And for all the agitation and action afoot, it’s unlikely the dollar’s dominant position will be challenged anytime soon. The strength and size of the US economy remains unchallenged, Treasuries are still one of the safest ways to store capital and the dollar makes up the lion’s share of foreign-exchange reserves.

The renminbi’s share of all foreign-exchange trades, for example, may have climbed to 7%, but the dollar still makes up one side of 88% of such transactions.

“It’s very hard to compete on the fiat front — we have the Russians doing that by forcing the use of rubles, and there’s wariness with the yuan as well,” said George Boubouras, three-decade markets veteran and head of research at hedge fund K2 Asset Management in Melbourne. “At the end of the day, investors still prefer liquid assets and in this sense, nothing can replace the dollar.”

Nevertheless, the combination of moves away from the dollar are a challenge to what then-French Finance Minister Valéry Giscard d’Estaing famously described as the “exorbitant privilege” enjoyed by the US. The term, which he coined in the 1960s, describes how the greenback’s hegemony shields the US from exchange-rate risk and projects the nation’s economic might.

And they may ultimately test the entire Bretton Woods model, a system that established the dollar as a leader in the monetary order, which was negotiated at a hotel in a sleepy New Hampshire town at the close of World War II.

The latest efforts “do indicate that the global trade and settlement platform that we’ve been using for decades may be beginning to fracture,” said Homin Lee, Asia macro strategist at Lombard Odier in Hong Kong, whose firm oversees the equivalent of $66 billion.

“This entire network that was born out of the Bretton Woods system — the Eurodollar market in the 1970s and then the financial deregulation and the floating rates regime in the 1980s — this platform that we have developed so far may be beginning to shift in a more fundamental sense,” Lee said.

Valuable Lesson

The net result: King Dollar may still reign supreme for decades to come, but the building momentum for transactions in alternate currencies shows no sign of slowing — particularly if geopolitical wild cards continue to convince officials to go their own way.

And the US government’s willingness to use its currency in geopolitical fights could ironically weaken its ability to pursue such methods as effectively in the future.

“The war in Ukraine and the sanctions on Russia will provide a very valuable lesson,” Indonesian Finance Minister Sri Mulyani Indrawati said last month at the Bloomberg CEO Forum on the sidelines of the G-20 meetings in Bali.

“Many countries feel they can do transactions directly — bilaterally — using their local currencies, which I think is good for the world to have a much more balanced use of currencies and payment systems.”

–With assistance from Shruti Srivastava, Sudhi Ranjan Sen, Adrija Chatterjee, Daniel Flatley, Nguyen Dieu Tu Uyen, Yujing Liu, Anirban Nag, Claire Jiao, Grace Sihombing, Philip J. Heijmans, Jeanette Rodrigues, Arun Devnath and Finbarr Flynn.

(Adds comment from former BOE deputy governor in fifth paragraph)

Most Read from Bloomberg Businessweek



23 Comments on "Suddenly Everyone Is Hunting for Alternatives to the US Dollar"

  1. makati1 on Fri, 30th Dec 2022 3:51 pm 

    Barring a world war, it will take a while to switch to a new financial system, but it is well under way. The observations stated in this article are not news, just a hash of comments and observations. As usual, DoomBorg tries to put lipstick on the US pig.

    The US cannot be trusted, as proved by its recent theft of several country’s reserves, gold, property, etc.. No one is safe from its megalomania and greed. Treaty’s and Contracts mean nothing to the US. Lies and hypocrisy rule there.

    “King Dollar” will be lucky to survive the next few years, let alone “…reign supreme for decades to come…”. But then, this composition is from DoomBorg. Get out of the dollar and the US, if you can. NOW.

  2. Hello on Fri, 30th Dec 2022 7:44 pm 

    I just visited Montreal, once a beautiful Canadian city.

    You couldn’t tell you were in Montreal. Just like any other Western city it crawls with 3rd world vermin. Niggs, ragheads etc. Crazy.

  3. Hello on Fri, 30th Dec 2022 7:51 pm 

    I just heard the news. Europe is experiencing shortage of skilled labor. The solution? Spain is planning on importing millions of south american. Germany wants to import millions of indians. All of europe keeps importing millions of niggers. Add in the pakis, kanacken and other raghead sludge coming in unhindered and you start to wonder.

    Only 30 years ago niggers were something you only new out of national geographics in Switzerland. Nowadays you can’t go anywhere without seeing that trash.

    Even the smallest towns now have a nigger infestation problem.

    Amazing. When all is done it took only about 50 years to destroy europe be self-inflicted damage. That is an amazing performance. Pissing away ones homeland to 3rd world invaders and other semi-humanoids without a fight in that short of a time frame. Bravo Europe, I respect you !!!

  4. makati1 on Fri, 30th Dec 2022 9:29 pm 

    And is visited by narrow minded, arrogant tourists, like you, Hello. You better get over your phobia as 90% of the world is populated by those of permanent tan, different cultures and languages. The other 10% will be mixed races in another generation or two. No one is pure race anything in today’s world. No one.

  5. Hello on Sat, 31st Dec 2022 5:53 am 

    I hear you mak, I certainly do. But seriously? Mixed with a nigger? I mean have you looked at a nigger lately? That stuff belongs in the zoo, next to the gorilla cage.

  6. Biden's hairplug on Sat, 31st Dec 2022 2:57 pm 

    @Hello – the US empire, responsible for this mess, is almost over and will meet its creator in Ukraine/East-Asia.

    The liberation isn’t very far off. Leave it to Russia-China. Armageddon in North-America is next. Ragnarok.

  7. makati1 on Sat, 31st Dec 2022 4:17 pm 

    Hello, you are aware that that word can get you blocked on some sites and killed on the street?

  8. makati1 on Sat, 31st Dec 2022 4:29 pm 

    Biden’s, I agree with your above observation. The road for the rest of the world will be rough for a while as they adjust, but it cannot happen too soon. The world will cheer the US demise.

    Can you imagine:
    No US foreign military bases.
    No ASAID, NED, FaceBook, ETC..
    No meddling in foreign countries governments.
    An isolated America, north of Mexico.
    Amerika as a 3rd world country.
    I can.
    It would be a well deserved payback for all the hell it has done to the rest of the world.

  9. eee on Sat, 31st Dec 2022 10:13 pm 

    The president of heart aerospace have been judged by GOD and found guilty of profanities against GOD. He will be executed by bloody deadly facial skin cancer, Earth is not a paradise. Earth reality is an execution chamber made to kill permanently undesirable souls like yours. Your soul is attached to your body and through electrical impulsion, you can control all the muscle of the human body. GOD control the rest of your body, skin development, heart, liver, digestive system. It is pretty easy for GOD to kill the heart aerospace president with facial skin cancer.

    GOD is still in control of the whole Earth reality. Earth reality is actually an execution and torture chamber created by GOD himself. We run the equation set responsible for electricity generation, we control the equations sets responsible for the degradation entropic of any matter on earth. We even control the equations set of the battery you are using for you shitttty airplance.

    GOD dislike the brown shit skin, the negro, the gay metro sexual white man like you, asians , sand niggers.

    GOD with your death

  10. Ponzi is strong on earth on Sun, 1st Jan 2023 12:14 am 

    I am pretty sure the CEO and board of director and VP of heart aerospace are dishonest crooks running a Ponzi scheme to personally enrich themselves. I am pretty sure that you are transferring some of the investor money into some offshore hidden account. Once you have enough money you will declare bankruptcy and leave Sdwden.

    This is why GOD is executing all of you with deadly facial skin cancer: CEO and board of director and VP. GOD is feed up and is not removing from earth reality dishonest people like you and your associate.

  11. makati1 on Sun, 1st Jan 2023 12:42 am 

    The children have access to the internet again. Or, maybe too many drugs? More proof of the decline of the West. It’s going to be an interesting 2023.

  12. Dredd on Sun, 1st Jan 2023 9:09 am 

    Well, that’s the norm for the season of the witch (January Six Committee).

  13. it makes no sense at all on Sun, 1st Jan 2023 3:21 pm 

    Is it all true?

  14. Hello on Sun, 1st Jan 2023 3:30 pm 

    >>>> Hello, you are aware that that word can get you blocked on some sites and killed on the street?

    I hear you mak. I feel we’re on the same page.
    I’m sure europeans in the philipines can be insulted all day without any danger to the insulter.

    Not so in the West. The invasion has progresses so far, as the natives are not allowed to speak the truth anymore. You point out in public the self-evident truth of negros/raghead trash, you get yourself in trouble. Yes, it’s that bad.

    Last time I visited the US a negro immigration flat-nose looked at my passport. Can it get any worse than that? A negro can decide if I can visit a european colony. Fuck me. I though I’ve seen it all. But I’m afraid that’s only the beginning.

    If you’re not allowed to defend what’s yours, no wonder it’s taken from you.

  15. makati1 on Sun, 1st Jan 2023 4:56 pm 

    I agree with most of your assertions, Hello. The only exception is that the EU is a colony of the US, not the other way around. The EU is so up the US ass that it has not seen sunshine (freedom) for a long time.

    Also, if you persist in being so racist, your future may be short. The world is changing. Adjust or die.

  16. makati1 on Sun, 1st Jan 2023 4:58 pm 

    Hello, maybe you fell safe behind a screen and keyboard with your racist rants, but someday you will slip up and say it in public and maybe not walk away alive. Think about that.

  17. Duncan Idaho on Sun, 1st Jan 2023 5:17 pm 

    Newly-Elected Georgia Rep Steps Down After Drug Arrest

    No big deal– just a repug making a few extra bucks. Capitalism at its finest

    https://www.huffpost.com/entry/danny-rampey-georgia-rep-drug-arrest_n_63b1e981e4b0fe267ca9df48

  18. Duncan Idaho on Sun, 1st Jan 2023 5:32 pm 

    “Bolsonaro has been reduced to aimlessly walking around a gated community in Orlando after fleeing Brasil due to fears of several criminal investigations now that he no longer has presidential immunity. Pathetic end to a failed and corrupt fascist.”

    Right Wing Fascists are not the brightest porch lights on the block.

  19. makati1 on Sun, 1st Jan 2023 8:11 pm 

    Same could be said for the Amerikan Dumbocrats, not that they really run the US anymore. All are government whores doing the Deep State bidding while getting rich from insider info. 2023 ids going to an interesting year.

  20. peakyeast on Mon, 2nd Jan 2023 8:32 am 

    Cutting off Russia from swift e.t.c. being one of the biggest exporters of raw materials was foolish. Now the US secured China and others essentials for production and energy.

    It is like shooting yourself and all your friends in the feet multiple times and keep on shooting until there is nothing left at all.

  21. Duncan Idaho on Mon, 2nd Jan 2023 2:52 pm 

    San Francisco is now the least air-conditioned city in the US

    Even Seattle is in the rear view mirror.

    Also the richest.
    Is there a correlation?

  22. makati1 on Mon, 2nd Jan 2023 4:14 pm 

    Peakyeast, obviously the West is on a suicide mission. Russia and China provided the West with most of the things it needs, from food to meds to metals, etc.. Its foolish theft of Russian reserves, property, etc. tells the rest of the world that nothing is safe if it is a Western country or banking system.

    It’s long list of sanctions is only hurting the Western countries as anyone in freezing Urope can attest. The same pain is coming to Amerika in 2023. The US is already in a recession and experiencing stagflation. Is a depression next? I think so.

    These actions are also doing a great job of revealing the lies and hypocrisy of the West, especially the US. Treaties and agreements between the US and anyone else mean nothing. But then, the Constitution, Bill of Rights, etc. have been shredded in Amerika already.

    I watch from far shores but know the pain will spread as the empire tries to keep its lost power by any means, including war, and maybe, nukes. I hope you are prepared for the future as best you can be. I am.

  23. Message to th4e WEF on Mon, 2nd Jan 2023 5:24 pm 

    All the members of the WEF, including their family, wife, husband are about to be executed by using bloody deadly facial cancer.

    Borge Brende, WEF president, is already showing sing of beginning of deadly facial skin cancer.
    https://www.youtube.com/watch?v=vBn12IbET8I

    The human body is a vehicle to with a soul is attached to and the soul can control the muscle using electrical impulsion. The soul also receive electrical shock once the human body experience pain. The rest of the human body is controlled by GOD, heart, liver, aging process, skin growth, and so on. If GOD control the aging process of the human body, he can easily give you deadly facial cancer. Earth is not a paradise, it is a execution chamber to kill undesirable souls.

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