4 reasons countries to break away the dollar
1. US monetary policies
2. The strong USD
3. Structural shift in the global oil trade
4. Russian sanctions fuel alternative trade currencies
US monetary policies –
The US holds significant influence over the global economy due to its role as the issuer of the world's reserve currency, giving it dominance in international trade and payment systems. This has led to what's been termed an "exorbitant privilege," allowing the US to potentially avoid debt crises by simply creating more money. However, this also means that other countries must closely monitor and adapt to US economic and monetary policies to protect their own economies.
The strong USD –
The strengthening US dollar is making imports costlier for emerging nations. Argentina has responded to this by using yuan instead of US dollars to pay for Chinese imports. Economists at Allianz warn that a stronger USD could undermine its reserve currency status, leading borrowers to explore alternative options. Brazilian President Luiz Inácio Lula da Silva advocates for alternative trade-settlement currencies, encouraging cooperation among Brazil, Russia, India, China, and South Africa to reduce reliance on the US dollar.
Structural shift in the global oil trade –
The petrodollar's status as the world's reserve currency is at risk due to changing global trade and oil demand. The initial dominance of the US dollar came from Gulf countries using it for oil trading, cemented by a historic deal between Saudi Arabia and the US in 1945. However, the shale-oil revolution made the US energy independent and an oil exporter, potentially affecting the USD's role as the global reserve currency. Strained US-Saudi relations, combined with the shale-energy revolution, raise concerns about Saudi Arabia abandoning its US-denominated oil pricing. These shifts could weaken the petrodollar's longstanding position.
Russian sanctions fuel alternative trade currencies –
The imposition of sanctions against Russia has had far-reaching implications, prompting other countries to seriously contemplate the adoption of backup currencies for their trade transactions. As the international community responded to Russia's actions with restrictive measures, nations around the world have become increasingly aware of the risks associated with relying solely on a single dominant currency for global trade. This newfound awareness has sparked discussions and explorations into alternative currencies that could provide more stability and security in the face of geopolitical tensions and economic uncertainties.
In a recent article, we connected the dots to help explain the factors contributing to the current high-interest rate environment and bank runs. We also provided insights into the risks and future opportunities that lie ahead using the 'Quantamental' approach.
$WTI Crude Oil - Aug 2023(CL2308)$ $Gold - main 2308(GCmain)$ $USD Index(USDindex.FOREX)$
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