-Analysis-
PARIS — Americans are a strange bunch. Fifteen years after allowing the eruption of the largest global financial crisis in nearly a century, they were not even able to prevent a bank with more than $200 billion in assets from collapsing in a few hours.
These people are as careless with their public accounts as they are with their private finances. This year, the U.S. public deficit is expected to approach 6% of GDP, almost double that of the European Union. As if this impasse were only a minor problem.
Can we continue to trust a country’s currency so inconsistent with money?
More and more countries are answering this question by buying gold. After beginning their return to the yellow metal in 2009, just after the great financial crisis, central banks acquired 1,136 tons last year. A record for over half a century!
And if they have increased their purchases, especially in emerging countries, it is not only to protect their reserves from inflation or banking crises. It may also be with monetary plans in mind.
For the power of the dollar is increasingly difficult to bear. The United States has turned it into a weapon.
Currency as a weapon
For three decades, the currency has become a lever by which Washington imposes on other countries the respect of rules decided by the Americans alone. Like the embargo on Iran, following which the American authorities have severely condemned European firms that have continued transactions with Tehran via dollars (in 2014, BNP Paribas had to pay a fine of billion).
Last year, the weaponization of finance took a new step. Following the invasion of Ukraine, the United States and Europe decided on unprecedented sanctions that affected not only the assets of the Russian Central Bank, but also the means of payment.
“The patent abuse of the role of the dollar as a global reserve currency will weaken it,” retorted Russian Foreign Minister Sergey Lavrov.
Post-Bretton Woods
Beyond Russia, the sanctions have caused a shock in many emerging countries, starting with China. If the United States can block a financial system with its Western allies, another financial system must be set up! Indonesian President Joko Widodo, for example, has recommended that local governments do without Visa and MasterCard.
The focus is on the dollar, both a tool and a symbol of U.S. financial dominance. Plans to pay for commodities in other currencies have been accelerated. India now pays for Russian barrels in rupees. China is multiplying agreements to pay for its purchases in yuan (nickel in Russia, oil in Iraq) and to facilitate currency exchanges (Brazil, Argentina). It could also use its digital central bank currency as a monetary spearhead. Brazil and Argentina dream of a common currency.
However, it is too early to talk about the de-dollarization of the world. The power of a currency cannot be decreed. It is built over years and even decades, by inspiring confidence in traders and investors. For this to happen, a solid economy, liquid and open financial markets, and credible regulations are needed.
The dollar replaced the pound as the world’s currency in the 1920s because the U.S. economy was thriving while the U.K. economy was weakened by the war. The Bretton Woods Agreement, signed 20 years later, only formalized the dollar’s dominance.
A Chinese leap forward
And for now, the dollar remains at the heart of world finance. This is true in trade. It is involved in 88% of foreign exchange transactions, well ahead of the euro, which is at 31% (in these 2022 figures from the Bank for International Settlements, the sum is equal to 200% because each transaction involves two currencies).
Transactions involving the yuan have jumped by a whopping 70% in three years… but they represent barely 7% of the total.
This is also true for the other major function of money — reserve instruments. Nearly 60% of the world’s foreign exchange reserves, which amount to some trillion, are still denominated in U.S. currency.
China has held fewer U.S. Treasury bonds than at any time in the past 15 years, but it appears to be replacing some of them with US-issued real estate-backed bonds, purchased via Belgium or Luxembourg.
The de-dollarization will inevitably take place one day. But it will not happen any time soon.
