Rising doubts about the greenback’s supremacy

It is anticipated that as confidence in the greenback erodes further, search for an alternative currency or basket of currencies supported by gold reserves will replace the dollar

By M. S. Qazi

The greenback has enjoyed unquestioned supremacy during the past few decades as a financial trading instrument and a trustee of global FX reserves primarily because of the strength of the US economy. It single handedly, even during today’s difficult economic conditions produces GDP of around $14 trillion, more than the combined GDPs of Japan, Germany and China. Its strength, infact lies in high consumption by the American society, manufacturing capacity including lethal war weapons with state-of-the-art innovative technology and capacity to absorb domestic and external shocks. As a consequence, many countries that significantly include China, Japan and oil producing Gulf States have been staking their surplus earnings in US securities to their mutual benefits.

The latest figures of investment in US securities stand at $7.2 trillion. Out of these, share of Gulf States is $2.1 trillion, China $2.3 trillion, and remaining is the share of Japan and other smaller countries. Reserves of most of the countries account for around 80.0 per cent in the greenback. All these factors give enough leverage to Washington to not only influence global trade and economic system in the world through multilateral financial institutions that are heavily tilted towards it, but also enable it to manage global diplomacy and inter-state relations, according to the US strategic national interest.

The huge trust placed in the greenback made it obligatory for successive US administrations to tread carefully about the role of US in global economy, diplomacy and inter-state relations. But, as the luck would have it, they defaulted on this account particularly after the emergence of the US as sole global power in their quest for US hegemony. They did not do justice to the people where it was required across different regions of the world. They ventured military interventions where prudence and diplomacy would have perhaps yielded better results in favor of the US. US pushed itself into Iraq and Afghanistan with an enormous war expenditure of more than a trillion USD, according to a conservative estimate. The military expenditure has struck crippling strokes to the US economy.

Right at a time when the US was endeavoring to establish its hegemony across the world at an enormous cost to its economy, balance of economic power was shifting from Washington to new emerging centers of economic power in Asia and Europe. Euro that started at 0.87 per cent value against USD now stands at $1.5 per Euro. It has emerged as an alternate currency to greenback for trading and may be for dumping trade surpluses and surplus petrodollars by many countries. Iran maintains its reserves in Euro. Yen and Yuan have also emerged as strong currencies against a weak dollar. A gradually weakening USD is causing worries for stakeholders across the world.

Equally important is the fact that none of the US administrations during the past many years cared about the steady loss of US share in global trade, its ever increasing trade and fiscal deficits that were likely to weaken the greenback and make it less attractive. It is being anticipated that as confidence in the greenback erodes further, search for an alternate currency or basket of currencies supported by the gold reserves would be on the cards. Recent meetings of finance ministers and central banks’ governors of emerging and developed economies of Brazil, China, Russia and Japan though officially denied, gave enough credence to the fact that greenback is at a losing end.

The new emerging economies because of sheer strength of their share in global trade, trade surpluses, huge FX reserves and sound health of their economies and financial systems are well placed vis-à-vis the US to air their views on alternate currency to the greenback. In addition to these factors, there is a political angle to seeking alternate currency: none of the governments of the emerging economies would wish to be constrained by the US to extend their influence in oil rich regions to ensure energy security for their countries. China has felt the heat when its oil production concessions in Iraq remained blocked by the US. It has, according to analysts prompted Beijing to combat US hegemony to safeguard its national energy interests. Saddam Hussain had to pay the price presumably for rejecting USD for trading his country’s oil. It had irked Washington considerably.

Prices of gold have recently surged to around $1050 per ounce and are likely to increase further. They could hit $1300 per ounce by early next year, according to some analysts. The increase in gold prices is attributed to rush by China (and India) to purchase the yellow metal after it lost interest to invest further in the US securities. Erosion of purchasing power of US dollar vis-à-vis other global currencies has convinced China to invest in the yellow metal heavily.

The British daily The Independent reported around two weeks earlier that some of the oil producing Gulf Arab countries have launched moves along with China, Japan, Russia, Brazil and France to price oil exports in gold and a basket of non-dollar currencies; the Japanese Yen, Chinese Yuan and Euro and use it for international trade settlements by 2018. Some analysts are of the view that in case USD is to be replaced by a basket of currencies along with gold, Russia’s Ruble and the British Pound are likely to find their place in the basket of currencies. The recent call by the UN for a new global reserve currency like the SDR (Special Drawing Rights) of the IMF has further eroded the credibility of the USD as global currency. Some of the countries like China and Russia agreed earlier this year to use their national currencies in bilateral trade at the US dollar’s expense.

The simple fact that the US economy is the single largest economy of the world and has inherent strengths to ride over serious economic crisis and bounce back will be fully exploited by the US to preserve existing status of the greenback, unless the situation in Afghanistan turns out to be another Vietnam for Washington. It might then force Washington to concede to limits of its economic, diplomatic and military power. Till then, Washington will go all out to retain the hegemony of greenback.

How far it would succeed to counter the looming doubts about the credibility of its currency will depend on two factors. One, how quickly the US economy comes out of the current crisis? Two, to what extent the USD would appreciate or depreciate further vis-à-vis other currencies that now matter in international trade? Disinvestment of $7.2 trillion stuck up in US securities would also count significantly in any process of agreeing on a new reserve currency or mechanism. Developing countries like Pakistan will have to resolve the dilemma of disinvesting their USD denominated securities. Irrespective of the multiple problems that would prop up, there are strong indications that greenback is on slippery grounds because of emergence of other centers of economic power. The greenback can’t hold all the centers of economic power together any further. Each one of them is ambitious about its share in managing global trade that they consider is due to them.