US relations with China and Russia can be strained, but they need the dollar

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The most effective weapon in the struggle between America and its strategic and economic competitors might be 100 US cents.

Countries like Russia and China resent the dominance of the dollar, but there is little they can do but take a stand and make relatively benign adjustments to their monetary arrangements. Russian President Vladimir Putin acknowledged this at the end of last week, telling reporters that “we don’t want to get rid of it, because it is a universal currency”. The Chinese yuan internationalization campaign, which received support from the International Monetary Fund in 2016, is go nowhere fast.

Putin spoke after Russia’s oil fund has said it will wipe out dollar holdings and transfer them to euros, gold and yuan. The transfers will take place in central bank reserves and have had little impact on the markets. The backdrop to all of this is Russia’s objection to the sanctions Washington has applied since Putin annexed the Crimean Peninsula to Ukraine in 2014. The country has since tried to reduce its exposure to US assets. . In 2019, state-owned oil giant Rosneft transferred its export contracts to euros. Russia’s share of exports sold in US currency fell below 50% for the first time in the fourth quarter of 2020.

Despite his comments, Russia has acknowledged that the male is so pervasive in global commerce that it is difficult to function as a modern society without him. The dollar represents nearly 60% of global central bank reserves and 88% of foreign exchange transactions are against the US currency. About half of cross-border workers international loans and debt securities are denominated in greenbacks. When markets seized up at the start of the Covid-19 pandemic, it was the Federal Reserve – not the Bank of Russia or the People’s Bank of China – that threw its arms into the global financial system.

But is the primacy of the dollar impregnable? There are reasons to be skeptical. The record budget deficits in the United States will require the sale of more Treasuries which will boost the global supply of the currency, and the trade deficit widens. (No argument either.) While the dollar-dominated central bank reserves account for 59% of the total, it’s the lowest level in 25 years, according to the IMF. The Fed’s actions in March 2020 were effective in preventing a public health crisis from becoming a financial cataclysm, but the institution is extremely climate-sensitive in Congress. Lawmakers can cut off its wings whenever they want. The Fed has avoided this shock so far; overseas central banks which received dollar exchange lines when the pandemic broke are allies or partners of the United States. It would be difficult for the Fed to give a swap line to, say, China or even Hong Kong. Policymakers would be hammered on Capitol Hill. Ultimately, these red lines can hinder efficiency.

Beijing’s attempt to raise the yuan’s profile has yielded meager returns to date, but is seen as a long-term game. The country’s gross domestic product is expected to surpass that of America by the end of this decade. China will contribute more than a fifth of the total increase in global GDP until 2026, according to Bloomberg calculations based on IMF forecasts. The United States and India will be second and third, with Japan and Germany completing the top five.

However, gross size may ignore some underlying dynamics of regions where the greenback reigns, even outside of US borders. The dollar zone’s share, defined as economies whose currencies fluctuate less against the dollar than the euro or other key currencies, has remained at 50% to 60% of global GDP, wrote Robert McCauley, senior researcher non-resident at Boston University Global Development. Policy Center. “While the dollar zone has shrunk geographically as the border between the euro and the dollar has shifted east in Europe, faster growth in an Asia more tied to the dollar has maintained the dollar’s share. “said McCauley, former head of the Fed and the Bank for International Settlements. , said in a newspaper this year.

Given this firepower, could the United States go too far and encourage more places to diversify? For all the popular fascination with Chinese aircraft carrier and anxiety Putin throwing his weight away, Washington easily deployed dollar diplomacy – or dollar guns. Russia finds this a source of great irritation. “Geopolitics plays a role,” Finance Minister Anton Siluanov told state television at the St. Petersburg International Economic Forum last week. “We try to protect our investments.

Russia, China and other adversaries will continue to try to undermine the dollar’s supremacy. They may even have some success at the margins. To replace the dollar, a contender for the throne must have American attributes, including deep and liquid capital markets, an independent central bank, and the rule of law, to name a few – and none of its flaws. People are right to worry about an increasingly polarized political system, which can delay policy making and erode the perceived legitimacy of fundamental institutions. The January uprising, when crowds of pro-Donald Trump supporters stormed Congress, was a lesson in the explosive margins of democracy and caused great damage to reputation. And at some point, Americans might lose their appetite for the global economic, diplomatic, and military responsibilities they have assumed since 1945.

Until then, get ready for a dollar future. However, you don’t have to take Fed Chairman Jerome Powell or President Joe Biden at his word. Putin did the job for them.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

To contact the author of this story:
Daniel Mousse at [email protected]

To contact the editor responsible for this story:
Rachel Rosenthal at [email protected]

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