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Countries are souring on the US dollar. Is dedollarization really a risk?


Is the U.S. dollar really at risk of losing its reserve currency status? Dedollarization talks are heating up as more countries look to cut the U.S. dollar out of trade transactions. What would a move away from the U.S. dollar mean for the U.S. economy and what currency could replace it? Geopolitical strategist Peter Zeihan joins Straight Arrow News for an in-depth conversation.

This year’s buzzword: Dedollarization

In 2023, more and more countries are talking about mobilizing against the U.S. dollar, which has been the global reserve currency for nearly a century. The idea of dedollarization is not new but the world is seeing renewed momentum behind it, enough to get the attention of bigwig economists and major financial institutions.

First, the basics: What does it mean to be the world’s reserve currency?

The global reserve currency is the dominant currency countries hold and use for international trade. For example, over the past two decades, about three-quarters of trade invoicing in Asia happened in U.S. dollars, not the Japanese yen, not the Chinese yuan. Central banks and other financial players hold more U.S. dollars than any other currency by a long shot. The U.S. dollar became the official global reserve currency in 1944 (read more about how that happened here).

A large percentage of commodities, like gold and oil, are priced in the global reserve currency, so other countries hold this currency to pay for those goods.

What does it take to be the world’s reserve currency?

A reserve currency needs to be stable and safe. There has to be a massive amount of that currency in circulation to be able to facilitate transactions all over the globe.

“You have to not care at all what happens to the value of your currency on any given day because if you go in and actively manipulate the exchange rates for trade purposes, then no one is going to use your currency because they don’t know what it’s going to do. It’s not reliable,” geopolitical strategist Peter Zeihan told Straight Arrow News.

Because of that, Zeihan said it’s hard to see a currency like the Chinese yuan taking the place of the U.S. dollar someday.

What’s driving dedollarization talk?

The most pressing anti-dollar movement is coming from BRICS countries (Brazil, Russia, India, China, South Africa). The group of nations is discussing whether to introduce a common currency to use for trading purposes to cut out the greenback.

Why is this significant? The BRICS bloc consists of more than 40% of the world population and about a third of global economic output.

Despite heads of state proposing a BRICS currency as an option, Zeihan told Straight Arrow News he has serious doubts the bloc would ever agree to it.

“We’ve got R and C whose relationship is a tryst. We’ve got R and S who compete. We’ve got R and I who don’t trade, I and C who don’t trust, C won’t let enough happen to make anything move and that just leaves B and S and you know, color me a skeptic.”

Peter Zeihan, geopolitical strategist

Here’s what other people are saying about a BRICS currency

A BRICS currency isn’t the only threat.

Even without BRICS nations agreeing to create a new currency, international investors are still moving away from the U.S. dollar, weakening its dominance as the global reserve currency. Trends show investors and countries are diversifying into the euro and yuan, mainly.

What’s driving it? Inflation and higher interest rates are piling on the dollar’s problems. Then, in August, Fitch Ratings cut the U.S. government’s credit rating in the latest blow to dollar dominance.

The U.S. dollar’s share in central bank reserves has fallen from 71% in 1999 to less than 59% in 2022, according to IMF data.

The sanctions sting

The U.S. action to aggressively sanction Russia following its invasion of Ukraine was largely so powerful because of the U.S. dollar’s standing as the world reserve currency. But the move is now also triggering dedollarization fears as countries look at how to get away from the overpowering influence of the U.S.

“They’re creating a secondary economy in the world totally independent of the United States. We won’t have to talk about sanctions in five years because there’ll be so many countries transacting and currencies other than the dollar, that we won’t have the ability to sanction them.”

Sen. Marco Rubio, R-Florida

The U.S. weaponized the dollar. But here’s why Zeihan says it’s still the “least bad option for everyone, even the Russians.”

Would your money lose value if another currency takes over?

There are a lot of dedollarizing theories out there, even though most experts cast doubt the U.S. will lose the reserve currency status anytime soon. One such theory is that the U.S. dollar would become worthless if it is not the reserve currency.

While Zeihan insists dedollarization will not happen — “I should say never is a very long time, I shouldn’t say never” — if it did, he said the dollar would just revert back to a normal currency.

“There is a cost in that scenario that would probably force our political leaders to be a little bit more judicious with their spending in the long run because we wouldn’t be able to just dump our debt on everyone else’s system. That’s probably the real superpower: It allows us to not be fiscally responsible.”

Peter Zeihan, geopolitical strategist
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