The US Dollar has been the dominant global currency for decades, but its supremacy is being challenged by some countries, and mostly in the Eurozone. Why are they turning away from the greenback, and what are the implications for the global economy?
One of the main reasons why some countries in the euro are rejecting the US dollar is because of its strength relative to other currencies. The US dollar index, which measures the value of the dollar against a basket of six major currencies, reached a 20-year high in September 2022. This means that the dollar can buy more goods and services abroad, but it also makes exports from other countries more expensive and less competitive in international markets.
One of the main reasons why countries are rejecting the US dollar is the overuse of economic sanctions by the United States. Sanctions are a tool of foreign policy that aim to coerce other countries or entities to change their behavior by restricting their access to the US financial system and markets. However, sanctions also have unintended consequences, such as eroding the trust and confidence in the US dollar as a reliable and neutral medium of exchange.
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As a result, some countries that are targeted by sanctions or fear being targeted in the future are looking for ways to reduce their dependence on the US dollar and diversify their reserves and trade settlements in other currencies, such as the euro, the yen, or even cryptocurrencies.
Another reason why countries are rejecting the US dollar is the divergence of economic and monetary policies between the United States and other major economies. The US economy has recovered faster from the COVID-19 pandemic than most of its peers, thanks to its massive fiscal and monetary stimulus. This has led to a stronger US dollar against other major currencies, making US exports less competitive and increasing the cost of servicing dollar-denominated debt for many emerging markets and developing countries.
Moreover, the Federal Reserve is expected to start tapering its asset purchases and raising interest rates sooner than other central banks, creating uncertainty and volatility in global financial markets. In response, some countries may seek to adjust their exchange rate policies or intervene in currency markets to limit the appreciation of their currencies against the US dollar or to prevent disorderly capital outflows.
The emergence of new technologies and platforms that enable faster, cheaper, and more secure cross-border payments. The rapid growth of digital currencies, such as stable coins and central bank digital currencies (CBDCs), has opened new possibilities for international transactions that bypass traditional intermediaries and reduce reliance on correspondent banking networks.
Similarly, some countries have developed or joined alternative payment systems, such as SWIFT alternatives or regional payment arrangements, that aim to facilitate trade and financial integration among like-minded partners and avoid potential disruptions from US sanctions or regulations.
The rejection of the US dollar by countries for international payments has significant implications for the global economy. On one hand, it may foster greater diversification and resilience of the international monetary system, as well as enhance financial inclusion and innovation.
On the other hand, it may also pose challenges for global financial stability and cooperation, as well as undermine the effectiveness of multilateral institutions and norms. Therefore, it is important for policymakers to monitor these developments closely and engage in constructive dialogue and coordination to address potential risks and opportunities.
Another reason why some countries are rejecting the US dollar is because of geopolitical tensions and trade disputes. For example, Russia and China have been reducing their holdings of US Treasury bonds and increasing their use of their own currencies or alternative reserve currencies, such as the euro or gold, for international transactions. This is partly a response to the US sanctions and tariffs imposed by the Trump and Biden administrations. By diversifying their currency reserves, they aim to reduce their dependence on and vulnerability to the US dollar.
Why some countries in the Eurozone are rejecting the US dollar is because of their ambition to increase their influence and autonomy in the global financial system. The eurozone is the second-largest economic bloc in the world, after the US, and it has a common currency, the euro, that is used by 19 out of 27 EU members. The euro is also the second-most widely used currency in international trade and payments, after the dollar.
By promoting the use of the euro for cross-border transactions, especially in areas such as energy, commodities and digital services, the EU hopes to enhance its economic sovereignty and strategic autonomy.
The rejection of the US dollar by some countries has far reaching consequences for both sides of the Atlantic and beyond. For the US, it means that it may face more challenges in maintaining its global leadership and leverage, as well as higher borrowing costs and inflation risks.
For the Eurozone, it means that it may benefit from more trade opportunities and lower exchange rate volatility, but also face more responsibilities and expectations as a global actor. For other countries, it means that they may have more options and flexibility in choosing their preferred currency for international transactions, but also more uncertainty and complexity in navigating a multipolar world.