Changing currency dynamics - from bipolar to multipolar world

KARACHI:

For decades, the US dollar has dominated the global financial system and has borne the weight of being the world’s reserve currency.

According to the International Monetary Fund (IMF), about three-quarters of global currency reserves were stored in US dollars before the turn of the century, but this has since dropped to 59%, with the trend expected to accelerate.

While the dollar still accounts for 90% of global trade and commerce, China, Russia, Saudi Arabia, India, and Iran are moving away from pricing in US dollars and are looking to sell and trade their produce and energy raw material in their respective currencies.

The emergence of multipolar currency systems, which envisions a world in which many currencies share the function of international reserve assets and trade invoicing, might have substantial consequences for the US dollar and the global economy.

Reports of the dollar’s destruction have been around for at least half the 80 years when it has led the pack since WWII.

Let us look at why the US dollar is losing momentum, driving the globe to explore alternatives, and if those alternatives are dependable enough to fill the void.

One of the factors is the rising population outside of the US. China and India are becoming formidable forces because of their growing population sizes, which account for more than 35% of the world’s population, with the US a distant third at less than 5%.

This expanding population offers a massive market for consumption, and these nations have leveraged their industrial capacity to provide cheaper goods than the rest of the world, dominating the supply chain as well.

According to a World Bank survey, China’s GDP will be roughly double that of the US by 2030, and both nations’ broad resources would be nearly equal. China would have significantly risen up the curve and would be on an equal footing with the US and Japan in terms of diplomatic power.

Similarly, India and China will outnumber the US in demographic resources by 2050. As a result, the next decade will be critical in determining how the planet is passed on to the next generation.

While it is unlikely that a country or regional currency, or cryptocurrency for that matter, would soon threaten the US dollar’s supremacy, it can be claimed that the duty of preserving the position of a global currency has influenced the US’s financial wellbeing.

The United States has been increasing its borrowing to continue funding its planned and/ or unanticipated expenditures to fulfill its so-called self-created onuses as the defender of the third world.

It is a demanding position with several hassles and annoyances. That is why, since 1945, we have seen the US and other allied forces battling in Indochina’s rice paddies, Colombia’s cocaine fields, the Islamic world’s oil complexes, and Sub-Saharan Africa’s rainforests.

Growing unhappiness with the US dollar’s hegemony and its use as a tool for political and economic pressure is one of the key motivations of multipolar currency systems.

Many nations, particularly those facing US sanctions or trade disputes, have moved to diversify their reserves and trade payments to try and minimise their reliance on the dollar.

In bilateral commerce and investment, Russia and China, for example, have boosted the use of their currencies and other alternatives, such as gold and cryptocurrencies.

Argentina has also agreed to a currency swap with China to pay for its imports in yuan instead of US dollars. India has negotiated agreements with 16+ countries, the latest being Bangladesh, to trade/ supply its material in Indian rupees.

Following the Ukraine war, Russia successfully launched bilateral currency-based commerce with India. Russia now finds itself in a situation where it has an abundance of Indian rupees but no avenues to use them.

The development of digital technologies and platforms that enable faster, cheaper, and more secure cross-border transactions is another element that might support multipolar currency systems.

China has been a trailblazer in this arena, introducing the digital yuan and the Cross-Border Interbank Payment System (CIPS) as alternatives to the dollar-based SWIFT system.

Other nations and regions, like the European Union and BRICS (Brazil, Russia, India, China, and South Africa), have stated a desire to develop their own digital currencies and payment systems.

The advent of multipolar currency systems may have far-reaching implications for the global economy, particularly the US dollar and its ailing economy.

On the one hand, it may diminish demand for dollars and weaken their value, affecting the US’s capacity to fund its debt and deficits.

This would result in more quantitative tightening, budgetary limitations, crowding out of private investments, and spiraling inflation, a new phenomenon that the US population may not be prepared to deal with.

It might also reduce the US’s power and leverage in international affairs since it would lose its privileged status as the world’s reserve currency issuer.

On the other side, it may foster increased rivalry and collaboration across currencies and regions, leading to improved global financial system stability and efficiency.

It may also stimulate greater financial product and service innovation and diversity, which might benefit consumers and businesses throughout the world.

The move to a multipolar currency world is inevitable, but not imminent because the US dollar continues to enjoy numerous benefits over other currencies, such as liquidity, flexibility, and reliability.

The rate of change would be decided by how various players adapt to these changes and develop their roles and interests in the face of a shifting global economic landscape.

The writer is a student of Behavioural Finance, a Treasury & Wealth Management Professional, and a Visiting Faculty at IBA

 

Published in The Express Tribune, May 29^th, 2023.

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