The Strategist

The dollar’s positions are unshakable. Here’s why

05/03/2018 - 10:58

A small but growing number of countries are trying to get rid of the US dollar in calculations and operations and to shake its position in the world financial system.

Yet another such country was Iran, which last week announced its intention to report on the amount of foreign exchange reserves in euro, not dollar and other measures to get rid of the dollar dependence. China has been trying to sign international trade agreements in RMB for many years, and in March the country began trading oil futures, denominated in national currency. The Venezuelan authorities announced transfer of external payments to the euro and other currencies, and also introduced a crypto currency. Russia is increasing the share of gold in reserves in order to diversify them and to be less depending on the dollar.

However, such measures did not shake the global position of the dollar.

Depreciation of the dollar by 6% over the past year partially reflects inconsistency of Washington's policy on trade and other issues, says Barry Eichengreen, professor of economics at the University of California at Berkeley. The uncertainty generated by the current administration of the US president in such areas as foreign trade, international alliances, interest in a strong dollar, may eventually stimulate additional efforts to create an alternative to the US currency. However, such attempts are unlikely to yield a result - as they did not give it in the past, economists believe.

In 2015, the currency regime was more or less tied to the dollar in almost 60% of countries, which account for 76% of world GDP, according to an analysis by Harvard University professor and former IMF chief economist Kenneth Rogoff. The Bank for International Settlements says that the dollar is involved in almost nine out of every 10 transactions in the world foreign exchange market, and its daily turnover amounts to $ 5.1 trillion. And it accounts for almost 60% in the currency reserves of central banks, amounting to $ 11.42 trillion. The last decades have been marked by "a tremendous increase in the dollar's dominance," says Rogoff.

Most countries will agree that doing business in one major currency is more convenient. International transactions become easier and cheaper for companies, and so does trade in commodities for investors.

After the euro was introduced in 1999, its use began to grow, the volume of cross-border lending in a single currency increased. However, after the debt crisis in the euro zone, the chances that the euro would seriously push the dollar in the international arena have become quite illusory. In 2009, the euro's share in the currency reserves of central banks reached a maximum of 28%. According to recent data, it is now about 20%, although some analysts expect some of its growth after the European Central Bank begins to wind up the policy of monetary incentives.

The recent actions of Iran are not the first attempt to reduce dependence on the dollar. Former Iranian and Venezuelan presidents Mahmoud Ahmadinejad and Hugo Chavez used to welcome depreciation of the dollar, suggesting that the price of oil be converted to euro. However, both oil and other raw materials continue to be quoted in dollars. Iranian rial has since lost three quarters of its value relative to the dollar; its rate fell by 14% only from the beginning of the year, and residents of Tehran lined up to exchange riyals for hard currency in April. Venezuelan Bolivar almost depreciated over the same period.

China's attempt to create a benchmark in the yuan for the oil market, which would be compared to the European brand Brent and the American WTI, "looks like an unsuccessful undertaking," experts of the Council on Foreign Relations write. After all, according to the interbank payment system SWIFT, in February, 1.6% of domestic and international payments were made in RMB. And the share of the yuan in foreign exchange reserves is 1.2%.
Beijing's efforts could have produced a more visible result if it had lifted restrictions on the movement of capital, because foreigners always prefer foreign-exchange currencies for international transactions in which they can be effectively saved and invested.