Brazilian scholar: "Weaponization of the US dollar" accelerates "de dollarization" of the currency | US dollar | Brazil

Introduction:

In recent years, the position of the US dollar as the world's preferred reserve currency has sharply declined. Although the US dollar has always been the main currency for international transactions and a global reserve currency, the Federal Reserve's monetary policy has ignored its potential externalities on the world economy, leading to sustained recession pressure on many countries around the world. Although the position of the US dollar as the world's main currency cannot be replaced at present, the weaponization of the US dollar has prompted countries to seek safe alternatives, with the role of the renminbi constantly becoming prominent.

At the end of April this year, a research report released by globally renowned asset management company Eurizon SLJ showed that the position of the US dollar as the world's preferred reserve currency will sharply decline in 2022, and this news will have a significant impact on the international financial system. The report states that in 2003, the proportion of the US dollar in the total global foreign exchange reserves was about two-thirds. By 2021, the proportion had dropped to 55%, and last year it had further dropped to 47%. Within a year, the decline was as high as 8 percentage points, the largest decline since the beginning of this century. Since the outbreak of the Russia-Ukraine conflict, the status of the US dollar as a reserve currency has been declining at an accelerated rate.

This trend is also reflected in the report "The Hidden Erosion of the US Dollar Dominance: Positive Diversification and the Rise of Non Traditional Reserve Currencies" released by the International Monetary Fund in March last year. The report states that a characteristic of the evolution of the international reserve currency system over the past 20 years is the gradual de dollarization, the recent slight increase in the role of the renminbi, and changes in market liquidity, relative returns, and reserve management that have enhanced the attractiveness of non-traditional reserve currencies.

Since the signing of the Bretton Woods Agreement in 1944, the US dollar has been the main currency for international transactions and the global reserve currency. In the past 80 years, the US dollar has become a "public good", with all countries and private institutions anchoring their funds to the dollar and entrusting them to a place that should theoretically be a "safe harbor" - this is the Federal Reserve headquartered in Washington.

However, despite its status as an international monetary standard, the Federal Reserve's monetary policy only considers the specific situation of its own country, ignoring its potential externalities on the world economy. At present, in response to the soaring inflation since 2021, the interest rate of treasury bond bonds of the United States has suddenly increased, which has led many countries around the world to face continuous recession pressure, forcing central banks to also raise interest rates and try to cool their economies.

The special status of the US dollar poses a major issue, which is the weaponization of the US dollar. For example, in early June 2019, two Iranian cargo ships were stranded at a port in Brazil due to a lack of fuel, but the Brazilian national oil company refused to refuel these two cargo ships. The reason is that the companies to which these two cargo ships belong are on the US sanctions list, and Brazilian oil companies are concerned that if they provide refueling services to them, they may also be sanctioned by the US and even sued by the US Department of Justice. It was not until late July that the Brazilian Supreme Court finally ruled that the company was required to provide fuel for these two cargo ships.

Due to a lack of trust in the US dollar and the international clearing system SWIFT, the term "de dollarization" has recently become increasingly frequent in international economic news reports, and many countries are also seeking ways to trade in currencies other than the US dollar, such as the Chinese yuan, Russian ruble, Indian rupee, or UAE dirhams.

In the process of de dollarization, the role of the renminbi is worth mentioning. Since 2015, the Chinese yuan has been included in the Special Drawing Rights currency basket of the International Monetary Fund, and its use has been rapidly promoted. In addition, China has also created its own international financial trading system - the RMB cross-border payment system, which is increasingly emerging as a secure alternative to the SWIFT system. With the comprehensive launch of digital RMB, this role will be further enhanced.

Of course, it is still too early to say that the position of the US dollar as the world's major currency has been replaced, but the weaponization of the US dollar is indeed prompting countries to seek safe alternative solutions to ensure their international reserves and trade security, and to avoid the risk of unilateral sanctions. In the oil trade negotiations between the governments of China and Saudi Arabia, as well as in foreign trade transactions between Russia and China, this trend towards the Chinese yuan can be seen. In this regard, Brazil and Argentina have recently announced that they will use RMB to settle Chinese imported goods, which is a trend worth paying attention to.

The old hegemonic order is incompatible with the emerging, more democratic, and multipolar world order, and de dollarization is the direct consequence of this contradiction. In fact, the abuse of its position as an international reserve currency issuer by the United States is undermining its control over the global financial system in the medium to long term, which is precisely one of the main foundations of US hegemony.