HONG KONG - BY ASIA INSIDER - May 02,2024

Pakistan and Argentina have recently made significant shifts away from their traditional reliance on the US dollar in international transactions. Pakistan has made its first government-to-government purchase of 100,000 tons of Russian crude oil using the Chinese yuan instead of the US dollar. This marks a departure from their usual practice of using the dollar for export payments. Similarly, Argentina has recently settled transactions worth a staggering $2.721 billion with China, using the yuan as the primary currency.

 

In April and May, 19% of Argentina's imports were settled in yuan, a move that is expected to strengthen their foreign exchange reserves and enhance their control over the economic landscape.

 

The adoption of the yuan for trade in Chinese-imported goods by the Argentine government on April 26 is seen as a significant blow to the dominance of the US dollar. These examples highlight the growing trend towards alternative currencies in international trade and raise questions about the long-standing hegemony of the US dollar.

 

As countries like Pakistan and Argentina embrace non-dollar payment systems in major transactions, the appeal of diversification and reduced reliance on the American currency becomes increasingly evident. This ongoing shift signals a subtle yet significant transformation in the global financial landscape.

 

A recent significant development has taken place as China and Brazil have entered into an agreement to conduct trade using their respective domestic currencies, bypassing the dominant influence of the US dollar. This move signifies a shift in trade relations between the two economic powerhouses, with China being Brazil's largest trading partner and bilateral trade reaching an impressive $150 billion in 2022.

 

Notably, the yuan has become Brazil's second-largest international reserve currency, further highlighting the growing role of the Chinese currency on the global stage. China's decision to continue importing crude oil and LNG from Gulf Cooperation Council (GCC) countries while settling trade in yuan reinforces this trend. On March 28, China executed its first cross-border settlement in yuan for LNG sourced from the UAE.

 

The exploration of alternative currencies to reduce dependence on the US dollar is gaining momentum, with transnational and regional organizations like BRICS and ASEAN actively considering such measures. The currency momentum within BRICS is already significant and attracting interest from new countries seeking to join the group.

 

Additionally, Brazil and Argentina have proposed the establishment of a shared currency called the "SUR" to strengthen regional trade and financial interactions.

 

These developments highlight two interconnected phenomena: the diminishing dominance of the US dollar and the emergence of parallel currencies, particularly the Chinese yuan. Concerns about the sustainability of the dollar's power have persisted since the collapse of the Bretton Woods system and the introduction of the euro by the European Union in 1999. The global financial crisis in 2008-2009 and its aftermath further intensified these concerns.

 

The trend towards de-dollarization has accelerated in recent years, with central banks holding less than 59 percent of their foreign exchange reserves in dollars in the final quarter of 2022, compared to 70 percent in 2000.

 

While the euro's share of global reserves has seen only modest growth, from 18 percent to just under 20 percent, the Chinese renminbi (yuan) has rapidly gained traction, despite accounting for less than 3 percent of global reserve currency holdings.

 

In response to punitive measures imposed by the United States on Russia, including freezing a substantial $300 billion of Russia's foreign currency reserves and removing major Russian banks from SWIFT, an international interbank messaging service, alternative financial infrastructures led by Russia and China have emerged. These actions, often referred to as the "weaponization" of the dollar, unintentionally paved the way for the rise of parallel financial systems.

 

Russia and China have taken steps to establish their own financial networks, posing a significant challenge to the global dominance of the US dollar. The year-long Ukraine war has had far-reaching consequences, triggering notable transformations in economics, geopolitics, and culture on a global scale.

 

However, the most significant outcome has been the shift towards a multipolar world, moving away from the concentration of economic power within a single hegemonic force. This trend, promoting a more diverse and balanced global power structure, is gaining momentum and shows no signs of slowing down.

 

The recent surge in the value of the US dollar has had far-reaching consequences worldwide, causing significant disruptions for nations across the globe. One of the notable impacts is the burden it places on countries with dollar-denominated debt, as the stronger currency makes repayment increasingly expensive.

 

The fluctuation in the dollar's value has disrupted the global financial landscape, with its current position standing at an astonishing 10 percent higher since the beginning of the Ukraine war in February 2022 and a staggering 30 percent higher than a decade ago.

 

This trajectory has led smaller economies to seek refuge in alternative currencies and foster regional trade alliances. Moreover, the soaring dollar has imposed a heavy toll on countries reliant on imported essentials such as fuel and food, making them significantly more expensive. These repercussions raise valid concerns for nations grappling with mounting economic pressures.

 

In light of mounting concerns over the potential future use of US sanctions, countries like China are taking proactive measures to distance themselves from the US dollar. Analysts argue that this is crucial for safeguarding their economic stability.

 

China, having already faced US sanctions in sectors like semiconductor trade, is increasingly apprehensive about further consequences. Consequently, China is actively pursuing strategies to reduce its dependence on the dollar, driven by the need to ensure the seamless functioning of its economy in the face of potential challenges.

 

China's growing global economic influence poses a significant challenge to the US dollar's status as the world's reserve currency, particularly with its recent expansion into Middle Eastern markets, including the significant Saudi Arabian oil market.

 

This endeavor has the potential to tip the balance in favor of widespread adoption of China's currency, the yuan, which the Western media has dubbed as "yuanization."

 

China's substantial purchases of US Treasury bills during the 2008 financial crisis temporarily supported the US economy, but this trend has since reversed. China's reduced holdings of US debt, falling below $1 trillion, indicate a deliberate effort to minimize exposure to the dollar, especially in the face of escalating trade tensions.

 

For obvious reasons, China is more determined than ever to lessen its reliance on the US dollar. While it is challenging to predict when the yuan could potentially surpass the US dollar, one thing is certain—the process of de-dollarization is gaining momentum and exceeding the expectations of US financial managers.