An Attempt to Replace Dollar

A few days back, External Affair Minister Sushma Swaraj and a UAE official signed a currency swap Agreement. It means, henceforward both countries will do their trade through their own currencies. This is a global trend to replace US Dollar (USD) by other currencies. The USA has been using USD like a weapon, so it’s a quite global reaction and challenge to US hegemony. 

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External Affair Minister Sushma Swaraj visited UAE, last week. She and Juma Mohammad Al Kais, assistant undersecretary for foreign trade affairs in the UAE’s Ministry of Economy has signed a currency swap agreement. It means, henceforward, both countries can do their trade through their own currencies, either Indian Rupee or UAE’s Dirham. It is an example of a trend to give an option to avoid USD. The USA has hegemony on the global economy and it has been using USD as a weapon, since last 70 years. So, there is an obvious reaction against this US attitude, even in Europe there is a trend to replace USD. Meanwhile, China’s share in global trade has been increasing with momentum and now, race between the USA and China is in the mode of a cold war.

Global trade has been increased in the last two centuries and after the Second World War, economic interests have increased with investment phenomena. So, for economic relation between different countries, it requires something common, like currency. During British hegemony, it was British Pound. After the Second World War, likewise, the USA replaced British in a political platform, USD replaced British Pound too. So, USD got global recognition. This trend increased after the 1997-98 economic crisis. In that period, there was a great recession in Asian countries, especially ASEAN countries. It gave a boost to increase foreign currency reserve. You always have options for this reserve. But, USD is the best option between all these countries, because of the large size of the USA economy and other factors too. It means, you can invest in US economy anytime and with however size. Most important things are when disinvest, you get returns instantly and there is very little change in rate. So, all countries always attempt to keep investment in the USA market. If we see statistics of bonds in the USA, we can see China, Japan and Saudi Arabia in the first three places. Investments of these countries are much more than 500 billion USD each. 

Same thing reflected in foreign currency reserves too. According to statistics of IMF, in 2017 the total global foreign currency reserve was of 6.9 trillion USD. In it, the share of USD was 63.5%. Euro was in the second position with 20.4%. Japanese Yen and British Pound shares third place with 4.5%. Canadian Dollar (2%), Australian Dollar (2%), and Chinese Yuan (1.1%) follow them. European countries formed Euro to counter the USD. But, there is a large gap between these two currencies. Even many European countries prefer the USD instead of Euro. There are some complex issues like tax collection, some European countries have development issues. So, Euro could not become a challenger for the USD. The same thing is with Japan. The Japanese economy was in the second position for many years. Even today, it has a large share in the global economy. But, Japan’s GDP-loan ration is much high. So, preference for Japanese Yen is low. Importance of Chinese Yuan has been increasing. But, the Chinese government controls it very tightly. So, the world has a sceptic about Yuan. That’s why; the influence of the USD remains and the USA uses it with shrewdly. Sanction of Iran is an example of it.  China, India and many European countries imports oil from Iran. But, the USA sanctioned Iran in November this year and banned to use the USD to trade with Iran. The same thing had happened with Russia, in 2014. Venezuela, a country having highest oil reserve, is almost bankrupt now and it all because of sanctions of the USA. Turkey, a one-time close friend of the USA, has gone through the situation a few months back. So, there is a serious trend to challenge USA’s hegemony. Likewise, UAE, India and Iran also signed a currency exchange swap, in May 2018. It is all about to reduce dependency on the USD. Now, China is buying Iranian oil by its own Yuan. For Iranian oil, European countries are thinking to evade the USD. They have Euro for it. The basic reason for this displeasure is, the USA pulled out from P5+1 nuclear agreement, without any major reason. Other countries don’t have any objection against Iran. But, the USA president Donald Trump pulled out in May 2018 one-sided and have been increasing pressure on Iran.  Even in 2012-15, Iran had faced the same sanction and many countries did trade with other currencies.

The USD has a legacy of 70 year’s hegemony. But, the situation has been changed now. IMF has introduced Yuan in their basket, in 2016. Since then, China has made clear that it will challenge the USA in this front too. China’s trade with Iran in Yuan, we can see it as a beginning of it. In June, European Central Bank has changed their reserve of 611 million USD to Yuan. It may be a symbolic change. A share of the USA in global trade is 14% and that of China is 17%. So, China’s ambition to take place of the USA in the currency market it might be an obvious thing. Even, the GDP of Asian countries comprises 60% of global GDP and all Asian countries have a trade relation with China. So, it means a lot.

So, in near future, Currency race may intensify. So, we could not see our agreement with UAE or Iran, as an agreement with these countries only. But, we have to keep balance, while increasing relation with the USA, maintain our interests too.

This article originally published in Maharashtra Times, dated  16 December 2018. You can see this article at - https://maharashtratimes.indiatimes.com/editorial/ravivar-mata/search-for-the-dollar-option/articleshow/67107090.cms