The U.S. dollar is under a “serious threat” to lose its status as the world’s most traded currency soon due to its weakening valuation, said analysts.
Data from the International Monetary Fund showed that the greenback’s global market share had fallen from 71 percent to 59 percent over the last 20 years. Analysts also discussed recent news about China and its ally Russia trying to break free from the dollar’s dominance.
China began a strategic process to reduce the dollar exposure in its business dealings during Russia’s invasion of Ukraine. The process has significantly increased the Chinese yuan’s share in global reserve portfolios to almost three percent. China and Russia have also increased the use of gold in their dealings.
Breitbart economics editor John Carney, however, said the yuan would not be a dominant currency worldwide due to China’s closed-off communist system. The U.S., on the other hand, has a “very open” system that ensures no manipulation.
He added that Europe and Japan would likely continue to use the dollar. Oil countries like Saudi Arabia will also maintain a “close relationship” with the U.S. currency due to the convenience of storing their oil revenues. Carney argued that this situation would lead to alternated blocks, just like during the Cold War.
At the moment, the U.S. is trying to minimize its trade deficit with mainland China. Carney explained that the policy would benefit the U.S. economy and strengthen its dollar.
“As we try to cut down on that trade deficit, China naturally will have fewer dollars, which will mean that they need to move into a non-dollar-based system,” Carney said.
“So, this will benefit us as well. It’s part of our policy. It hasn’t been necessarily great for the U.S. economy to have the whole world work dollars. It actually could end up being beneficial.”
The U.S. dollar gained its dominance in the forex market after World War II. The fall of the Soviet Union made the U.S. the biggest global economy. In the 1970s, the greenback became a central currency in the global banking system.
Last year, sources suggested that China and Russia were working on a new gold-backed currency to facilitate their international trading activities. Neither China nor Russia confirmed the news, but data showed that China bought large quantities of gold last year as Russia’s access to the U.S. dollar was restricted due to the Ukraine War.
Foundation for Defense of Democracies senior fellow Craig Singleton said Chinese officials had discussed plans of reforming the global financial system and reducing the dollar’s dominance over the past decade. The presence of the new currency could protect these countries from the threat of U.S. sanctions.
China, Brazil to trade in their own currencies
Last week, China and Brazil signed an agreement to stop using the U.S. dollar as an intermediary currency for their bilateral trade. China will start using the yuan, while Brazil will use the real for any financial transactions between the two countries.
The new deal followed a preliminary agreement in January. Officials said transactions would be executed by the Industrial and Commercial Bank of China and Bank of Communications BBM.
According to the Brazilian Trade and Investment Promotion Agency (ApexBrasil), the new agreement will reduce trading costs between China and Brazil, leading to greater trading volume and investment.
China is currently Brazil’s biggest trading partner, recording $150.5 billion in bilateral trade throughout 2022. Brazil is now one of the biggest economies in Latin America.
In addition to Brazil, China has similar currency agreements with Russia, Pakistan and several other countries as a part of its effort to reduce reliance on the U.S. dollar.