Threats To The Hegemony Of The US Dollar

By Kumar David –

The answer to the question which is implicit in my title is that the world has changed a great deal, both post-Covid and as an accumulation of changes accruing since at least the Great Recession of 2009 when Obama tried his best to rescue capitalism. There are four Great Powers (US, China, EU and recently Russia) massaging the world and four other players (India, Brazil, Japan and the UK) to take account of. First is the USA, still global hegemon, second China which will within a decade overtake it for the rank of largest economy, third the European Union and fourth Russia which is now playing a strategically significant role. Add the other four (India, Brazil, Japan and the UK) and I seem to have bitten off quite a lot. Let’s see what I make of the task. 

At the end of WWII, the US was undisputed hegemon, globalisation the planetary ideology and the dollar was king. China then started rewriting the rules of the Great Game using the Belt and Road Initiative, the BRICS-group and a new post-Ukraine link with Russia, Saudi Arabia and Iran. Last year a summit between China and the Gulf Cooperation Council deepened China-OPEC ties. In a paradoxical way the Ukraine war pushed China and Russia closer. In economic terms China is the senior partner with an economy that is five times larger but Putin has turned Russia into a strategic player. The world is fracturing into a multipolar entity. It is unavoidable that this will undermine both the hegemony of the US and the global role of the dollar.

A significant factor bearing on my topic is this correlation among oil producing countries that emerged in the peace accord between Saudi Arabia and Iran brokered by China. Even worse for the US dollar is talk of settling oil accounts in Yuan, the ‘Petro-Yuan’. Were this to happen the dollars international status would be seriously undermined. There is also mention of Saudi Arabia and Iran joining BRICS; if that were to happen most of the world’s people and most of its oil production will be in groupings that exclude the United States. You can collect a great deal of information on these trends through Web searches and YouTube videos.

The Petro-Yuan is not the only attempt at de-dollarization. Another challenge to dollar hegemony is more serious. China and India are paying for commodities in renminbi, rupees and UAE dirhams. India has initiated rupee settlement of some accounts and China has approached GCC countries to make settlement in Yuan. Both countries pay for Russian oil in their own currencies. With the expansion of BRICs to beyond Brazil, Russia, India and China, non-dollar of trade flow is proliferating. International transfers are carried out by processes such as SWIFT by banks under the hegemony of the US government hence it is risky but necessary to unpin these from US government control and to create alternatives. These efforts are facilitated by the fact that the current the account surpluses of China, Russia and Saudi Arabia are at record highs. 

These three are involved in mining, manufacturing, gold extraction and farming & fishing while the US is less involved in direct investment in production in fast developing countries; activities in which it has less experience. It prefers to dabble in finance, insurance, stock brokering and mergers & acquisitions, not hard industry and agriculture. Such expertise is not a perfect fit to the needs of developing Africa, South America and Central America. Brazil and Argentina will soon launch a joint currency called the “sur” which could become a Euro like project that could embrace much of South America.

China has long pondered on the idea of settling non-oil trade in local currencies that exclude the greenback, according to UAE minister Thani bin Ahmed Al Zeyoudi. China seeks to weaken the dollar by pushing for the yuan to replace the greenback in oil deals. The move seeks to chip away at the Petro-dollar regime enthroned in the 1970s where after all global oil trades were settled in dollars.

Obstacles to dethroning the dollar

Incumbency, stability, liquidity, and absence of alternatives strengthen the US dollar as ‘de facto’ international currency and safe asset. it won’t be easy. Thanks to its global recognition it is easily cashable everywhere in the world. Incumbency is a great psychological advantage. Ninety six percent of the trade between North and South America between 1999 and 2019 was conducted in dollars; I do not have the statistics for recent years but it must still be considerable.

It is not the safest long-term store of value; that is the millennial privilege of gold. Even among currencies the Swiss Franc outranks the dollar for safety. Another challenge which I do not believe will have much traction is central bank digital (CBD) currencies. I dismiss crypto-currencies’; undependable as long-term stores of value (I tell my rich friends to buy gold).  But the block-chain, a technology for globalised information storage) has my endorsement. 

If China cashed all of its U.S. holdings (US$ 1.1trillion; same as Japan) the U.S. dollar would depreciate and the yuan appreciate, making Chinese goods more expensive and benefitting American trade. A multi-currency universe can only come hand in hand with political multi-polarity. We are some way from that because both Russian and Chinese military technology, which is what counts in limited-theatre engagements, are behind American technology. Hanging on to a large a megaton nuclear arsenal is irrelevant in a world of assured mutual destruction. 

Let me now touch on US determination to suffocate Chinese technology by banning microprocessor chip design capability, artificial intelligence, quantum computing, 5G, advanced semiconductors and next generation ultra-thin chip manufacturing capability. The US is reportedly going to ban ultra-thin chip making technology from reaching China. IBM recently unveiled an unbelievable 2-nanometer (nm) chip technology which will put 50 billion transistors, each the size of five atoms, on a space no bigger than a fingernail. The landmark technology—the smallest, most powerful microchip so far—could quadruple the life of cell-phone batteries and slash the carbon footprint of data centres.  

The competition is on; Samsung, and Taiwan Semiconductor Manufacturing Co the famed TSMC, have separately announced competing plans to produce this chip by 2025. In August 2022 the U.S. and Japan unveiled plans to build a joint research centre focused on 2-nm technology.

Faced with US sanctions since 2020 China has not been able to obtain from the Netherlands Extreme Ultra Violet (EUV) lithography fabrication machinery for the 7nm to 21nm range. It seems that so far China has been able to fabricate only 28nm chips on its own.

In previous columns I have spoken of the symbiotic relationship of economic expansion of China and Russia in the post-Covid, post- Ukraine war conjuncture. The two countries have a natural need to collaborate with each other and a 4300 km common border; the fifth longest common border in the world after USA-Canada if you include the Alaska border, Russia-Kazakhstan, Argentina-Chile and China-Mongolia borders. In future years as a paradoxical consequence of the Ukraine war it will assume far greater economic importance. Russia has the resources (it is the resource richest country in the world) and China huge wealth seeking productive investment opportunities. A powerful economic relationship will grow over time. That seems natural.

While I was more than half way through drafting this column, a friend brought to may notice a brilliant discourse about challenges to the hegemony of the dollar by Fried Zacharia, CNN-Channel’s top political analyst. Please find the time to log in.

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