The exorbitant privilege of the US dollar is not without challenges and calls for alternatives have grown louder in recent years.
Almost everyone talks about moving away from the US dollar as the world’s main currency for trade and finance. Those supporting this idea argue that diversification of currency reserves and increased use of regional currency arrangements could contribute to a more balanced international monetary system. From the major economic formations such as Brics (Brazil, Russia, India, China and South Africa) and Asean (Association of Southeast Asian Nations) to smaller players such as Kenya, all have added their voices to the debate.
After 1945, the US dollar emerged from the ashes and rubble of World War II to grant the United States significant geopolitical leverage. The establishment of the Bretton Woods institutions, namely the International Monetary Fund and the World Bank in 1944 solidified the influence of the US dollar. Since then the world’s economies are exposed to fluctuations in the value of the dollar, as well as the policies and economic conditions of the US.
The greenback allows Washington to exert influence over global economic policies, sanctions regimes and financial flows. By reducing dependence on a single country’s currency, nations can assert greater autonomy and safeguard their economic and political interests. The likes of China, India and Brazil have realised remarkable growth in recent years, leading to a rebalancing of global economic power.
The over-reliance on the US dollar as the primary currency for trade and finance may no longer reflect the economic realities of a multipolar world. But also this presents serious vulnerabilities and systemic risks for individual countries and the world. The 2007-08 financial crisis stands as a stark reminder of the vulnerabilities and risks inherent in the global financial system. For this reason, Alexander Babakov, deputy chairperson of Russia’s Duma, reportedly asked why all countries have to base their trade on the dollar.
As Stephen Jen, economist, co-founder and chief executive of Eurizon SLJ, puts it, The world has continued to rely on the dollar and been held hostage by the Fed’s policies. Diversifying away from the dollar can mitigate these risks, enhance resilience, and promote stability in the global financial system. Thus, establishing an alternative reserve currency, many regional currencies or a basket of reserve currencies would require overcoming the historical trust placed in the US dollar and assuring market participants of the stability and reliability of the new currency.
Nonetheless, the de-dollarisation is critical at this stage. Countries unhealthily hold dollars as reserves to maintain stable exchange rates, bolstered by the perceived strength and stability of the US economy. This situation unfairly empowers Washington to do as it pleases. For example, its central bank has an almost unrestricted latitude to print dollars to finance its deficits, while most countries must maintain surpluses or rely on external borrowing.
France’s former minister of finance, Valery Giscard d’Estaing, argued that the arrangement gave the US an “exorbitant privilege” that enables it to enjoy unique benefits in international trade and finance. For example, commodities such as oil continue to be priced and traded in dollars, and this inevitably cements American global acceptance. As things stand, the US has immense influence over global markets and allows it to exert control over other economies.
The Americanised international monetary system is criticised for impeding the sovereignty and autonomy of other countries. In essence, the dominance of the US dollar limits the policy space and flexibility of other nations in conducting their monetary policy, managing exchange rates, and promoting economic development. Geopolitical shifts and inevitable economic multipolarity fuel the desire for a more diversified and multipolar international monetary system that reflects the interests of multiple countries, and a more balanced international monetary system that reflects their economic realities.
This means the pushback against the dollar is both political and economic. The economic benefits of the exorbitant privilege of the dollar have facilitated Washington’s accumulation of immense amounts of debt, because it has been able to borrow in its own currency. As the global reserve currency, the dollar provided the US with a unique ability to finance its deficits and maintain a higher standard of living than it would otherwise sustain. The effects on others have been inequalities that lead to falling standards of leaving and underdevelopment.
In addition to the economic advantages, the dollar allows the US government to exert influence over global economic policies, shape international institutions and exercise control over financial transactions. The US and its allies are accused of “weaponising” the Swift system for international money and security transfers because they misuse the network to impose economic sanctions, restrict access or disrupt the financial flows of other nations.
The notable examples of the potential weaponisation of Swift are the cases of Cuba, Iran, Venezuela and Russia. In response to concerns about Iran’s nuclear programme, for instance, the US, the European Union and other countries imposed sanctions on Tehran. The same approach has been taken to fight Moscow following the Ukraine conflict. As part of these sanctions, the Swift system was pressured to exclude Iranian and Russian financial institutions from its network, effectively isolating them from the global financial system.
It is no coincidence that the expansion of the Brics membership is becoming important. The South African Reserve Bank sounds the alarm on the threat of possible economic sanctions on Pretoria for its stance on Russia’s invasion of Ukraine and broad relations with Moscow. The reality of the secondary sanctions means that any impediments or restrictions on South Africa’s ability to make international payments in dollars would have significant consequences for its financial system.
The exorbitant privilege of the US dollar is not without challenges and calls for alternatives have grown louder in recent years. The rise of emerging economies and the quest for a more balanced international monetary system have prompted discussions on diversification away from the greenback. The Brics currency could rattle the dollar’s dominance, and that time has finally arrived.
Zongyuan Zoe Liu, co-author of the study Can Brics Dedollarise the Global Financial System?, suggests that there is a strong possibility of the Brics bloc releasing a non-binding joint statement during the upcoming summit in August. This statement would signal their intentions to explore the feasibility of a new currency and potentially initiate pilot projects in this regard. As seen at the Hiroshima G7 Summit, a strong fightback is expected from the US and its Western allies and this could lead to currency crashes and global economic instability.
Siyabonga Hadebe is an independent commentator on socioeconomic, political and global matters based in Geneva, Switzerland.
The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.