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Saturday, July 12, 2025

12: US Dollar

Trump has set the stage for a colossal trade war – and it could spiral out of control
Why de-dollarisation is not possible: The enduring dominance of the US Dollar in the age of BRICS and Trump despite concerted efforts by major emerging economies, genuine de-dollarisation remains not merely difficult but fundamentally impossible in the foreseeable future. ......... The dominance of the US dollar in global finance is not merely a product of American economic might—it is a consequence of deeply embedded structural advantages that alternative currencies simply cannot replicate. Currently, approximately 47% of all payments processed through the SWIFT system are settled in US dollars, with the euro occupying a distant second place at 23%. Even the Chinese yuan, despite China's economic prowess, commands merely 4.6% of global payment flows. ......... The dollar's role as the world's primary reserve currency is underpinned by characteristics that emerging market currencies fundamentally lack: unparalleled liquidity, market depth, legal certainty, and institutional stability. These attributes have been cultivated over decades of American economic leadership and cannot be artificially constructed through political decree or multilateral agreements. .......... The International Monetary Fund's data reveals that whilst the dollar's share of international currency reserves has declined from over 70% in 2000 to approximately 59% in recent years, this apparent erosion masks a more complex picture. As J.P. Morgan experts note, the decline in reserve holdings has been more than offset by significant increases in dollar-denominated bank deposits, sovereign funds, and private foreign assets in emerging markets. The dollar's ecosystem has expanded even as its formal reserve status has marginally contracted. ............ The BRICS bloc—comprising Brazil, Russia, India, China, South Africa, and recently expanded to include Egypt, Ethiopia, Indonesia, Iran, and the United Arab Emirates—represents the most serious contemporary challenge to dollar hegemony. Yet their de-dollarisation efforts reveal the fundamental obstacles facing any alternative monetary system. ........... Russia's chairmanship of BRICS in 2024 has prioritised financial initiatives, including the development of the BRICS Bridge payment system and enhanced interbank cooperation in national currencies. The bloc's New Development Bank, established in 2015, has expanded its membership and project pipeline, whilst discussions of a potential BRICS currency backed by a basket of member currencies continue to generate headlines. .............. However, the reality of BRICS cooperation tells a different story. The recent summit in Brazil conspicuously avoided any mention of trade in local currencies or de-dollarisation in its final statement—a marked departure from the previous year's Kazan Declaration, which had welcomed the use of local currencies in financial transactions. This retreat occurred precisely as President Trump threatened 10% additional tariffs on countries aligning with what he termed "anti-American" BRICS policies. ........... The heterogeneous nature of BRICS members presents insurmountable challenges to monetary cooperation. India, for instance, has publicly stated that it is not actively pursuing de-dollarisation. Indian officials recognise that whilst alternative payment systems may be useful for trade with sanctioned countries, they cannot replace the dollar's fundamental advantages. Similarly, other BRICS members maintain significant exposure to dollar-denominated assets and continue to rely on dollar-based trade finance. ................

For any currency to challenge the dollar's dominance, it must satisfy the fundamental criteria of a reserve currency: stability, liquidity, market depth, and the rule of law. BRICS currencies fall short on every measure.

.............. The Chinese yuan, despite being the most credible alternative, faces significant limitations. Whilst China has made progress in internationalising the renminbi—with over half of Chinese payments now settled in RMB compared to previous years—capital controls and political uncertainty continue to constrain its global adoption. The yuan's share of global payments remains stubbornly low, and Beijing's authoritarian governance model raises concerns about long-term stability and predictability............ The Russian rouble, severely impacted by sanctions and geopolitical isolation, cannot serve as a credible reserve currency. Similarly, the Indian rupee, Brazilian real, and South African rand lack the necessary market depth and international acceptance. Even collectively, these currencies cannot overcome their individual limitations through artificial basket arrangements. .......... The proposed BRICS currency faces even greater challenges. Creating a stable, liquid, and trusted supranational currency requires unprecedented levels of economic integration, political cooperation, and institutional development. The eurozone's experience demonstrates the difficulties of monetary union even among relatively homogeneous economies with shared political frameworks. BRICS nations, with their diverse economic structures, political systems, and strategic interests, cannot achieve the necessary integration. ..........

the dollar's dominance, whilst beneficial, also imposes costs on the American economy through reduced export competitiveness and persistent trade deficits.

.............. future American administrations will continue to actively defend dollar hegemony through both economic and political means. ......... China's dumping of $53.3 billion in US Treasuries and agency bonds in the first quarter of 2024, whilst symbolically significant, represents a fraction of the overall Treasury market. More importantly, Chinese financial institutions continue to rely heavily on dollar-based correspondent banking relationships and trade finance mechanisms. ......... businesses continue to prefer dollar transactions due to their superior liquidity and acceptance. ............ The dollar-based financial system benefits from decades of development and universal acceptance that cannot be replicated quickly. ........... Even China, despite its strategic rivalry with America, maintains substantial economic ties that constrain its ability to abandon dollar-based systems. ............ The question is not whether the dollar will face challenges—it already does. ........... The most likely scenario is continued gradual diversification rather than dramatic de-dollarisation. Central banks may continue to accumulate gold and alternative currencies in their reserves, and some bilateral trade may occur in local currencies. However, these developments will occur at the margins rather than challenging the dollar's core functions. ........... The euro, despite its troubles, remains the most credible alternative to the dollar for certain functions. European markets offer depth, liquidity, and legal certainty that emerging market currencies cannot match. However, the eurozone's own structural challenges and geopolitical constraints limit its potential as a genuine alternative to dollar dominance. ............ The development of central bank digital currencies (CBDCs) and blockchain-based payment systems represents a potential technological pathway for challenging dollar dominance. The proposed BRICS Bridge payment system, connecting member countries through digital currency gateways, exemplifies this approach. ............. Digital currencies must still provide the stability, liquidity, and acceptance that users demand. Moreover, the United States and other developed economies are developing their own digital currency capabilities, potentially maintaining their advantages in the digital realm. ............... Network effects strongly favour established systems, making it difficult for alternatives to achieve the critical mass necessary for success. ............. The global financial system's evolution towards multipolarity is undeniable, but this evolution will occur within constraints that preserve the dollar's essential functions. Despite a decade of BRICS initiatives, aggressive Chinese financial diplomacy, and now Trump's protectionist threats, the fundamental architecture of international finance remains dollar-centric. ............. The reasons for this persistence are structural rather than merely political.

The dollar's dominance rests on America's deep capital markets, stable institutions, rule of law, and the network effects of established usage.

These advantages cannot be replicated through political agreements or technological innovation alone. ............ The future international monetary system will likely feature increased use of local currencies for bilateral trade, expanded regional payment systems, and greater central bank reserve diversification. However, these developments will supplement rather than supplant the dollar's core functions. The transition to genuine multipolarity would require fundamental changes in global economic structures, political relationships, and institutional frameworks that are not currently foreseeable. ............. de-dollarisation remains a compelling political narrative rather than a practical possibility. The dollar's dominance, built over decades of American economic leadership and institutional development, will persist not merely because of American power but because of the absence of credible alternatives. The BRICS nations' ambitious rhetoric has encountered the immutable realities of international finance, where trust, liquidity, and legal certainty matter more than political aspirations. .......... As the world grapples with increasing geopolitical tensions and economic fragmentation, the dollar's role as the ultimate safe haven and universal medium of exchange becomes more rather than less important. The very factors that drive de-dollarisation rhetoric—uncertainty, conflict, and economic volatility—simultaneously reinforce the need for a stable, liquid, and universally accepted international currency. In this paradox lies the explanation for why de-dollarisation, despite its political appeal and strategic logic, remains fundamentally impossible in practice.

US senators warn Nvidia CEO about upcoming China trip

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