Something is wrong with the dollar. In the last nine months, the US currency has entered a downward phase, depreciating against other world currencies. There are those who foresee a change of cycle, although other analysts are more cautious and continue to vindicate the dollar's reign.
Could this current weakness be another passing episode, as has happened on other occasions since the end of Bretton Woods? Could it be a structural trend caused among other things by the fact that China has been selling its dollars for years, after becoming the main holder of debt denominated in the greenback? Is it a collateral product of the invasion of Ukraine and Western sanctions against Russia?
A few days ago, Brazilian President Luiz Inácio Lula da Silva put on the table to his South American counterparts and Mercosur partners the need for their own currency, something like a euro, but South American. A currency that would leave the dollar aside.
Brazil is a member of the BRICS, together with China, India, Russia and South Africa, they move almost 50% of the world economy and for some time now they have been defending in various forums the need to de-dollarise their economies in favour of other currencies. Russia, with Russian dictator Vladimir Putin, is openly asking his Chinese counterpart, Xi Jinping, to move more quickly to use the yuan as a new currency to replace the dollar. And China is being accommodating.
Together they are a powerful group, recalls Anwar Zibaoui, an expert in economics and international affairs, and they account for 45% of the world's population.
"Although the BRICS are also suffering from the impacts of the conflict in Ukraine and other global crises, they maintain expectations of growth. We are currently witnessing a new international configuration with the re-establishment of diplomatic relations between Iran and Saudi Arabia and new accessions of important countries to the BRICS," says Zibaoui.
Cleverly, China's diplomacy is adding support by making a kind of amalgam united by a common interest: to receive investment flows, generate economic wealth and make nations prosper.
Jinping wants to expand the BRICS bloc to include Algeria, Saudi Arabia, the United Arab Emirates, Iran, Egypt, Argentina, Mexico and Nigeria; and he does not rule out Bangladesh, the Philippines, Indonesia, Pakistan, Turkey and Vietnam.
And, according to Zibaoui, it should not be forgotten that the New Development Bank (NDB), based in Shanghai and created with the contribution of the BRICS Central Banks, is emerging as an alternative to the traditional international financial organisations.
"With objectives such as escaping the hegemony of the dollar by promoting the use of national currencies, stimulating domestic demand in the countries, trade and investment or trying to avoid financial speculation in currencies. The credits would be used to build infrastructure and reduce inflation risk," says the business consultant.
A new consensus seems to be emerging that could parallel the one that has prevailed since the end of World War II and that the collateral consequences of Russia's invasion of Ukraine may have helped to detonate.
For his part, US analyst Marc Jones notes that the US bank JP Morgan warns of "some signs of emerging de-dollarisation" that are undeniable.
"Yes, there are signs of de-dollarisation in the global economy. While the dollar will continue to maintain its dominance going forward, in many parts of the world this phenomenon is occurring," the largest US bank acknowledged.
The dollar's share of foreign exchange trading volumes remains just below historical highs of 88% and its use in commercial invoicing has not changed much over the past two decades.
However, in foreign exchange reserves held by central banks around the world, for example, its share has fallen to an all-time low of 58%. Central banks are selling dollars to strengthen their local currencies.
"While it remains by far the largest share of any global currency it falls even further when accounting for gold which now comprises 15% of reserves compared to 11% five years ago," according to Jones.
Who is behind it? Jones points to the BRICS and other major commodity exporters that have been affected by the war in Ukraine and the sanctions that have cut Russia out of the financial system.
"Since then, Saudi Arabia and China have begun talks to settle Chinese oil sales with the yuan; Brazil and China have announced the gradual introduction of a yuan clearing arrangement for some of the trade between the two countries, while China and Russia are also doing a significant portion of their trade in yuan," Jones says.
A basket of currencies, of global currencies, is no longer a dream. The dollar monopoly is breaking up as envisioned by Nobel Prize winner Robert Mundell, one of the mentors of the euro, which began to be introduced in several European Union economies as early as 1999 and is now used by 20 of the 27 EU countries.
What is happening to world trade considering that the hegemonic currency is the dollar? Jones explains that trade turnover has not experienced much change, with the dollar and the euro maintaining a constant 40-50% share in recent decades, although the US share of world exports is now estimated at an all-time low of 9% compared to a record 13% for China.
Foreign exchange and external factors
The foreign exchange market is sensitive to each country's internal monetary policy manoeuvres; changes in the external market relationship for goods, services and commodities and with respect to the health of their respective balances of payments.
Other factors that may be more subjective also have an impact: the volatility scenario, the expectations of investors and of importers and exporters and investment fund managers regarding the immediate future, be it elections, a change of political regime, the impact of a catastrophe, or the request for external debt. Any factor that tends to cast a shadow over the outlook.
Then there are the manoeuvres of exogenous variables: changes in international benchmark interest rates, falls in financial or stock markets; economic contraction; economic, financial, stock market or exchange rate vicissitudes in trading or economic partner countries. Of course, a scenario of uncertainty and changes in supply and demand in international commodity markets, among others.
A series of factors can combine to cause a currency to appreciate or depreciate more or less against the dollar or any other currency.
In the particular case of the dollar, four years ago during the administration of Republican Donald Trump, there was a super dollar; the greenback was quite strong and this not only affected Mexico, but also Turkey and other mainly emerging countries.
In 2017, the Mexican currency was trading at 19.66 pesos to the dollar and Trump's victory heralded a change in monetary policy, investment and fiscal stimulus. On the day his presidential victory was announced, the peso depreciated to 17.35 pesos per dollar and began a race of depreciations at times above 21 pesos per dollar.
Trump based part of his government on the expansion of public spending and a strong dollar that also affected the Turkish lira, which reached its lowest level in a decade; it also had an impact on the euro, which gradually lost preeminence, and the same happened with the yen.
This super dollar has not lasted long and has begun to deflate with a correction brought about by a combination of factors: a shift in monetary policy in Democrat Joe Biden's administration; the impact of the years-long pandemic declaration and global difficulties in supply chains, the constant friction between the US and China with sanctions and tariffs that have lingered since they were imposed in the Trump administration; plus Russia's invasion of Ukraine; Western sanctions and monetary policy manoeuvres that have driven interest rates to a level not seen in the last two decades and fears of stagflation and a long economic crisis.
In the last week of June 2023, the peso continued to appreciate against the US currency to 17.50 pesos per dollar and this downward correction of the dollar is also visible in other emerging market currencies.
China sells dollars
Since last September, Reuters news agency reported that the Chinese central government has asked state banks to prepare to sell dollars and buy yuan in an effort to shore up the local currency.
The move could slow the yuan's slide, as it remains on track for its biggest annual loss against the dollar since 1994. Foreign exchange reserves of state-owned banks and their overseas branches, including those in Hong Kong, New York and London, were ordered to review overseas yuan holdings and check that dollar reserves are downgraded.
"The yuan fell 0.9% to 7.1340 against the dollar and is on track for its worst annual decline since 1994, having lost more than 11% so far this year. Earlier this week, China's offshore yuan depreciated to a record low against the dollar and its domestic unit fell to its weakest level since the 2008 financial crisis," according to Reuters.
If the dollar is being hit by a crisis of confidence in the immediate direction of the US economy, the yuan is affected by the tight control the Chinese state continues to exert in certain areas of the economy. Moreover, Beijing does not have a Wall Street.
In the opinion of Spanish analyst Vicente Nieves, on the international scene and taking into account the global set of commercial and financial transactions, the dollar is still king.
"However, the signs, clues and emerging trends that threaten this hegemony and call into question the dollar's reign in the future are becoming increasingly evident. The latest has recently occurred: the Chinese yuan or renminbi has overtaken the dollar for the first time in cross-border payments in China," according to Nieves.
Last March, the yuan was the most widely used currency for cross-border financial transactions in China over the greenback, a milestone for the "status quo" of the international financial system.
"The International Monetary Fund itself published a report inquiring into the rapid change in cross-border payments. There is no cause for alarm, as the dollar still dominates, but the incipient emergence of currencies such as the yuan may be the beginning of something important in the medium and long term," says the expert.
