The International Monetary Fund (IMF) has warned that the US dollar dominance as the global trading currency could be threatened by the sweeping sanctions taken against Russia from the late February 'military operations' undertaken in Ukraine. The IMF is worried that using currencies as a weapon will fragment the world economy while making it less efficient.
There are now countries rushing to find ways of transacting and storing money that circumvent the US currencies and financial markets, as well as those of their allies. Some countries are renegotiating the currency in which they get paid for trade.
Western countries, in unison with the US, EU and NATO, have imposed huge sanctions on Russia, including restrictions on its central bank, which could trigger the emergence of small currency blocs based on trade between separate groups of countries.
Russia has sought to reduce its dependence on the dollar after the US imposed sanctions in retaliation to its annexation of Crimea in 2014.
As of the end of January 2022, Russia held foreign currency reserves worth $469bn, which represented roughly a fifth of its foreign reserves in dollar-denominated assets just prior to the 'military operations' in Ukraine, with a notable chunk held overseas in Germany, France, the UK and Japan, who have now banded together to isolate Moscow from the global financial system, and have frozen more than half of Russia's reserves.
Gita Gopinath, the IMF's first deputy managing director, said the sanctions against Russia do not foreshadow the demise of the dollar as the reserve currency and that the conflict in Ukraine will slow global economic growth but will not cause a global recession.
Financial sanctions imposed on Russia threaten to weaken the dominance of the US dollar and could result in a more fragmented international monetary system, said Gopinath to The Financial Times. The conflict will also spur the adoption of digital finance, from cryptocurrencies to stablecoins and central bank digital currencies, she added.
Gopinath said the greater use of other currencies in global trade would lead to further diversification of the reserve assets held by national central banks and added, "Countries tend to accumulate reserves in the currencies with which they trade with the rest of the world, and in which they borrow from the rest of the world, so you might see some slow-moving trends towards other currencies playing a bigger role [in reserve assets]."
Two monetary systems might emerge, with one western and the other Chinese, and may operate in divergent ways that overlap.
The Great Economic Rivalry, by Graham Allison and associates at Harvard, have concluded that China is strong peer competitor of the US, and its currency could become global money, given the size and sophistication of its economy.
China hopes its currency, the yuan, also known as renminbi, will replace the US dollar as the global currency. The majority of international investors believe this will be inevitable, but none can say when.
When this happens Chinese exporters would have lower borrowing costs, more economic clout in relation to the United States, and would support President Xi's economic reforms.
On December 1, 2015, the IMF announced that it awarded the yuan status as a reserve currency, and added the yuan to its Special Drawing Rights basket on October 1, 2016. This basket currently includes the Euro, Japanese yen, British pound, and US dollar. By August 2015, the yuan became the fourth most-used currency in the world, as it surpassed the Japanese yen, Canadian loonie, and the Australian dollar.
Chinese exports are relatively more competitive against dollar prices around the world. Thanks to low-cost exports to the US, China's economic growth soared.
Global reserves account for about 2% and the use of the yuan around the world is rising, while the decline in the dollar's share can be accounted for by greater use of the Chinese renminbi.
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