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RIO DE JANEIRO, Brazil / BUENOS AIRES, Argentina, May 17, 2023 (IPS) – Half a century ago, the dominance of the United States dollar in the international financial and trading system was undeniable.
By 1977, the US dollar reached a peak of 85 percent as the currency in circulation in foreign reserves; In 2001, this position was still around 73 percent. But today it is around 58 per cent.
The dominance of the dollar and the hegemonic position of the United States have long been intertwined. And recent global changes are affecting America’s ability to keep up: the gradual movement of the center of gravity from west to east, the unraveling complexities of American domestic politics, the growing power of China’s international projection, and an international assertiveness in between. The countries of the Global South have controlled the dominance and status of the US dollar.
And yet, the currency still accounts for the largest share of global trade, foreign exchange transactions, SWIFT payments, and debt issued outside the United States. In fact, Western financial agents, government officials and well-known experts downplay so-called de-dollarization, arguing that a relatively weak dollar does not mean its demise.
Despite conflicting viewpoints, it is undeniable that the world system faces more complex, diverse and plural challenges that include currency competition and new inventive financial avenues.
resistance against the US dollar
The so-called de-dollarization in global finance has its milestones. The introduction of the euro in 1999 was significant because the European currency by now represented 20 percent of global foreign exchange reserves. By the dawn of the 21st century, an Asian currency unit also came to life: it represented a salad bowl of 13 currencies from East Asian countries (the ASEAN 10 plus Japan, China and South Korea).
Along with the successful spread of economic regionalization, Western-led geopolitics also became a source of global financial innovations that affected the superiority of the US dollar.
The growing resort to a sanctions regime against countries such as Russia, particularly since 2006 and against countries such as Iran following the annexation of Crimea in 2014, encouraged alternative currency regimes. To date, Washington’s sanctions policy punishes 22 countries.
Russia’s invasion of Ukraine in 2022 and the extension of sanctions hindering the use of US dollars encouraged even more de-dollarized practices. In response to the decision to disconnect Russia from SWIFT, Moscow upgraded bilateral fuel transactions with partial payments in roubles.
Simultaneously, Russia and a group of African countries began talks to establish settlements in national currencies, pegging both the US dollar and the euro. Meanwhile, China is trying to differentiate itself from the West and internationalize the renminbi, even though it represents less than 3 percent of official reserves worldwide.
Moscow and Beijing are moving closer on financial cooperation, with France and Saudi Arabia agreeing to use the renminbi in some oil and gas deals, while Bangladesh became the 19th country to trade with India in rupees.
Last but not least, gold is also moving up. As Ruchir Sharma recently observed, the major buyers are now central banks, which ‘are now buying more tonnes of gold than at any time since data began in 1950 and currently account for 1.5% of monthly global demand for gold’. The record is 33 percent. […] And 9 out of the top 10 are in developing countries.
In addition, some African countries appear to be willing to trade in currencies backed by rare-earth metals. In the Global South, in fact, there is a growing perception that de-dollarization is a step towards a multipolar world in which new actors, interests and rules interact. In this sense, it is becoming clear that a multi-currency trading regime is slowly emerging.
How Brazil ‘de-dollarizes’
De-dollarization has been incorporated into Brazil’s foreign policy strategy. Since the inauguration of his third mandate, President Lula da Silva has increasingly revealed his intention to address his inconsistencies with Western rule-setting. A stalled narrative that resists the dominance of the Global North in the world order has re-emerged.
There have been calls for inclusive reforms in global governance, condemnation of the geopolitical worldview has led to securitization methods and military escalation, and the dollar’s dominance in international trade and finance has been questioned. In the current context of tension and rivalry between great powers, Brazil seeks to speak for an autonomous voice of the Global South.
And thus, Lula has tried to promote peace in Ukraine based on dialogue that recognizes the voices of all parties involved in the war.
Lula’s de-dollarization position has been motivated by Brazil’s cooperation with BRICS as well as expanded bilateralism with China. Continuing to break records, Brazil-China trade ties are set to peak at $150.5 billion in 2022 (compared to $190.2 billion in the same year).
As bilateral relations progress, novel settlements are being negotiated, including during Lula’s recent state visit to China, aimed at tracking trade and financial operations directly with the Chinese renminbi and Brazilian reais.
Concurrently, the Brazilian government has decided to use BRICS’ multilateral bank, the New Development Bank (NDB), as a platform to defend a dollar-free trading system between its members and with countries benefiting from NDB credit lines. has decided.
By appointing former Brazilian President Dilma Rousseff as head of the bank, Lula advanced Brazil’s political commitment to this frontier. With the mention of the 2024 presidency of the G20, it will surely become a repeated pledge in Brazil’s performance in the global governance arena.
It is notable how the Lula government has sought a prudent strategy to balance its anti-dollar signals among its BRICS partners with a constructive presence in dollar-dominated territories such as the Inter-American Development Bank (IDB). .
Brazil has expanded its footprint in international finance from Washington to Shanghai, supporting the candidacy of ex-IMF official Illan Goldfan, who has chaired the IDB since last December.
Brazil has made the first attempt to bring the de-dollarization card to its South American neighborhood, especially Argentina. Last February, bilateral talks began to begin work on a common currency project that could reduce dependence on the US dollar. This could mean increased de-dollarization within the Mercosur region.
Following Brazil’s example, Argentina has begun to consider the use of the renminbi in its trade with Beijing. For Brazil, these are steps that could lead, step by step, to a regional financial sector with relative distance from US dollar dominance. However, the ongoing macroeconomic turmoil in Argentina, coupled with extremely low levels of foreign exchange reserves, will certainly hamper these plans in the short term.
Also, to tango would require more than two. If Argentina is to have a sustained economic recovery, Brazil will need to assure the support of extra-regional, heavy, non-Western actors in investment and trade flows, especially China and India, so that MERCOSUR can have a place in the world economy. A new entry can be made. ,
De-dollarization could form part of a dynamic reconfiguration of financial and productive intersections with other regions of Brazil and its neighbors and economic superpowers of the global economy. Needless to say, this is a long term strategy. The main consideration is the role South America could play in promoting a multi-currency trading regime in the near future.
For now, while a stark flag of Lula’s presidential diplomacy, Brazil’s relationship with the US dollar may be diminishing but remains of undeniable relevance. Decision-making in Brazil is governed by a complex inter-ministerial web of states responsible for the international sphere that cannot escape the influence of major production sectors in the private sector.
Thus, changing Brazil’s international financial practices will depend on key accommodations that cannot ignore a comprehensive domestic negotiation process, especially if combined with strengthening democracy.
Monica Hirst is a research fellow at the National Institute for Science and Technology Studies in Brazil; juan gabriel tokatlian Torcuato Di Tella is Provost at the University of Buenos Aires, Argentina.
Source: International Politics and Society (IPS), published by the Global and European Policy Unit of the Friedrich-Ebert-Stiftung, Hiroshimastrasse 28, D-10785 Berlin.
IPS United Nations Bureau