ADRIAAN PASK: No, the dollar’s days are not numbered

China, as we know, is a sizeable trading partner for many countries.  But talks between Russian and Chinese leaders about using the Chinese yuan as the principal trading currency between Russia and trading partners in Asia, Africa and South America have raised questions about the dollar’s future as the world’s reserve currency.

While this is an attempt to deweaponise the dollar and weaken its influence, how realistic is the view that it will be dethroned? 

In general, reserve currencies help to enhance efficiencies in the global trade of goods and services, investment and settling debt obligations. They offer a stable form of exchange and promote ease of trade. So why are emerging markets starting to dispute the dollar’s use? 

Benefits aside, a reserve currency has drawbacks in certain conditions. The dollar has strongly appreciated against all Brics currencies — excluding the yuan — in recent years, even breaching parity against the euro last October. 

Part of the issue is that a strong dollar disadvantages emerging markets. First, it affects their current accounts, especially if the prices of exported goods are under pressure. Importing goods becomes increasingly expensive and the offset from exports has less of an impact. Because of this, inflation is imported, which can have significant monetary policy implications.

What’s more, foreign debt becomes expensive to repay, potentially risking defaults. Some of the more ill-famed members of the emerging-markets family have also been on the receiving end of dollar “weaponisation” — that is, sanctions.

It’s understandable, then, that more emerging markets want to be less reliant on the dollar.  

Still, the desire to dethrone the dollar is not, in fact, new. As former White House economic adviser Joseph W Sullivan writes in Foreign Policy: “Murmurs in foreign capitals about a desire to dethrone the dollar have been making headlines since the 1960s. But the talk has yet to turn into results. By one measure, the dollar is now used in 84.3% of cross-border trade — compared to just 4.5% for the Chinese yuan.” 

Could the possible benefits of a Brics currency be enough to shift the dollar off its perch?

Not any time soon, in our view. In reality, the dominance of the dollar has already been in decline for 30 years due to increased globalisation. Yet it remains in a strong position, not just because it is so well supported, but because, for now, it is the only viable option. 

The US has a stable democratic system, a relatively stable economy, supported by reasoned fiscal and monetary policies. Its economy is globally free and open to international trade, yet regulated and governed by reasoned policies that offer protection to its participants. The GDP of the US accounts for almost a quarter of the world economy, which further supports the dollar’s reserve status. How realistic, then, is an alternative?

The crux here is that, unlike in the dollar’s case, the political systems of China or India, say, create uncertainties among investors. For example, Chinese authorities continue to exert control over that economy in a way that hinders the development of deep and liquid financial markets.

So, to challenge the dollar, Chinese authorities need to become a much more accessible source of global liquidity. It also appears unlikely that the Chinese government could pursue such a plan without first enacting changes aimed at building a more free and open economy, and therefore, extending more democratic liberties to its citizens, a rather substantial leap.

William Gumede, associate professor at the Wits University School of Governance, also notes that it took five decades for the world to switch to the dollar after it dethroned the pound as reserve currency. “A Brics common currency will require a central bank, which will require commonality in monetary policy, alignment of fiscal policies and synergy between political regimes across the trade bloc,” he wrote recently.

It means that, for now, investors can expect plenty of noise and volatility in emerging markets over dedollarisation. Realistically, however, there is no alternative — yet. In the meantime, the world’s contenders will simply have to clean up and catch up if they want to compete.

* Pask is chief investment officer at PSG Wealth