The US dollar, which settles almost half of all international transactions, has what appears today to be an unassailable stranglehold on international markets. With close to 60% of all countries pegging exchange-rate regimes to the dollar in some form, its dominance is not in peril – yet.
China has for years envisioned an internationalization of the yuan which befitted the country’s global economic clout. Now, with America’s continued aggressive use of sanctions, there is a new found urgency for other countries to support China’s efforts, or initiate their own.
Iran announced a move last week to replace the US dollar with the euro in official financial reporting, in a bid to circumvent restrictions on accessing the US dollar. A looming decision on whether to back out of the Iran nuclear deal, which could see sanctions re-imposed, comes as Tehran deals with a crippling currency crisis. The move followed the first-ever foreign exchange swap in Iranian rial and Turkish lira.
China approved the innaugural yuan-denominated crude oil futures last month, and regulators have reportedly asked financial institutions to make preparations for pricing the country’s crude imports in yuan. Financial industry sources told Reuters last month that China might start paying for crude imports in yuan as early as this year.
Both suffering under US sanctions regimes, Russia and Venezuela are also looking for ways to diversify away from the US dollar. And as The Wall Street Journal wrote Monday, these governments, eager to chip away at the US dollar’s role, are trying to take advantage of growing anxiety related to the current US administration’s trade policy.
Skeptics see no reason to think the dollar can be realistically challenged in the near future.
Economist Benn Steil has been arguing for more than a year now that, due in part to strict capital controls, Beijing’s efforts to internationalize the yuan have thus far yielded minimal results. In fact, he says the internationalization has gone in reverse over the past several years. Removing capital controls is a necessary first step for China, he says, and Beijing seems unwilling to make the move anytime soon.
Regardless of what happens in the short term, there is a small but determined cadre of nations that are looking for ways to circumvent the US dollar. As the world’s largest importer of crude oil, China may be the first to chip away in any significant way by pricing oil in yuan. Others are eagerly waiting for alternatives to gain momentum.