Why taking down the US dollar is easier said than done - part one

From the moment the US weaponised the dollar to impose near-unprecedented financial sanctions on Russia after its invasion of Ukraine it was obvious that other countries, most notably China, would try to reduce their own vulnerability to similar sanctions.

A recent spate of agreements that China has struck to use its currency directly in trade deals, and similar efforts by less-developed economies to substitute their currencies for transactions that have more commonly been executed with dollars, have intensified discussion about the end of the US dollar’s dominance.

Since the invasion of Ukraine and their seizure of about half of Russia’s $US640 billion ($944 billion) of dollar-denominated foreign exchange reserves, China and Russia have been conducting most – about two-thirds – of their significantly increased trade in their own currencies. The yuan is now the most traded currency in Russia and Russia also now holds about a third of the world’s yuan-denominated foreign exchange reserves.

China has struck a deal with Saudi Arabia to pay for oil purchases in yuan – the first time in nearly half a century that the Saudis have been prepared to accept anything but the dollar in exchange for their oil. It is seeking similar deals with other Middle Eastern oil producers.

Last week, China’s China National Offshore Oil Company and France’s TotalEnergies struck the first deal for a LNG cargo denominated in yuan.

Also last week, China and Brazil announced they would use their own currencies to settle trade and that Brazil would connect to China’s fledgling international payment system, its alternative to the US-dominated SWIFT international payments and messaging system.

India is trying to do more direct deals that reduce its exposure to the dollar. And in Latin America and South-East Asia, countries are also trying to circumvent the use of the dollar by doing more deals in their own currencies.

There’s even been talk of the creation of a “BRICs” (Brazil, Russia, China and India) reserve currency, perhaps backed by a basket of commodities.

The sudden surge in interest in what has been a perennial topic, the erosion of the dollar’s status as the world’s reserve currency and the global hegemony that confers, and China’s central role in most of the de-dollarisation that is occurring, has led some to believe that the end of the dollar’s post-war dominance is within sight.

While it is likely that, as has been the case since the turn of the century, the pervasiveness of the dollar in global trade and financial transactions will continue to wane, it is improbable that the end of dollar dominance will occur any time soon.That dominance is built on a number of critical foundations that no other economy has. The US runs large trade deficits and therefore creates more dollars than its domestic economy requires, it has very deep and liquid markets to absorb the savings of those countries with big trade surpluses, the dollar floats freely with very limited capital controls and it has a legal system that the rest of the world generally trusts.

Anonymous