De-dollarisation is something I have been writing about for a long time. Two recent events are another nail in the coffin for the dollar, and by extension, US hegemony.
The first event was Russia’s main stock exchange halting the dollar and euro trades. The second is Saudi Arabia not renewing the Petrodollar Agreement. Let’s delve into this a bit more.
De-dollarisation, the process of reducing reliance on the US dollar in international trade and finance, can have significant implications for the US economy and global financial stability. Two recent events underscore this trend and offer insight into the potential future of the US dollar and its influence on global markets.
Event 1: Russia’s Main Stock Exchange Halting Dollar and Euro Trades
In June, Russia’s main stock exchange halted dollar and euro trades in response to a new package of US sanctions over Russia’s special military operation in Ukraine. The sanctions, announced by Washington, target the Moscow Exchange, Russia’s primary stock market and clearing house for foreign currency transactions. The Bank of Russia announced that, due to these restrictive measures, the exchange trading and settlement of instruments in US dollars and euros would be suspended.
Context and Implications:
- Sanctions and Isolation: These sanctions represent another effort by the United States to isolate Russia financially. By halting dollar and euro trades, Russia further reduces its reliance on Western currencies, pushing it to seek alternative financial systems and instruments. Something it has been doing for years anyway.
- Shift to Other Currencies: In response, Russia will increase the use of other currencies such as the Chinese yuan, gold, or their own rouble. This shift will diminish the role of the US dollar and the euro in Russia’s economy, potentially influencing other countries facing similar sanctions to adopt similar strategies.
- Impact on the US Dollar: While this specific event may not drastically impact the global dominance of the US dollar immediately, it contributes to a broader trend of de-dollarisation. As more countries seek alternatives to the US dollar, global demand for it will continue decreasing.
- Inflation in the US: The immediate effect on US inflation might be minimal, but if de-dollarisation continues to accelerate globally, it will lead to higher inflation. Reduced global demand for the dollar will weaken its value, increasing the cost of imports for the US and contributing to inflationary pressures.
Event 2: Saudi Arabia Not Renewing the Petrodollar Agreement
A more profound shift is signalled by Saudi Arabia’s decision not to renew the 50-year petrodollar agreement with the United States that expired on 9 June 2024. This system, in place for 75 years, marked the US dollar as the world’s reserve currency, granting economic stability and access to rising asset prices. The arrangement between the US and Saudi Arabia helped preserve the US dollar’s dominance over global trade.
Context and Implications:
- End of the Petrodollar System: The Petrodollar agreement has been a cornerstone of the US dollar’s status as the world’s reserve currency. Saudi Arabia’s decision not to renew the agreement signals a significant shift in the global financial landscape.
- Diversification of Energy Transactions: Saudi Arabia will begin accepting other currencies for oil transactions, reducing the need for global oil buyers to hold US dollars. This move will encourage other oil-producing countries to follow suit, further eroding the dollar’s dominance in global trade.
- Impact on the US Dollar: The reduction in demand for the dollar for oil transactions will lead to a decline in the dollar’s value. As countries and investors diversify their reserves away from the dollar, the US could face higher borrowing costs and a weaker currency.
- Inflation in the US: A weaker dollar would make imports more expensive, contributing to inflation. The US might also face increased borrowing costs and a potential rise in interest rates as a result of diminished demand for dollar-denominated assets.
Overall Implications for the US Dollar and Inflation
Short-Term vs. Long-Term Effects:
- Short-Term: In the short term, these events might not cause dramatic shifts but will contribute to market volatility and uncertainty. The immediate impact on US inflation may be limited but could start to build as the effects of reduced dollar dominance take hold.
- Long-Term: Over the long term, these events signal a broader trend towards de-dollarisation that will undermine the US dollar’s role as the global reserve currency. This shift could lead to a sustained depreciation of the dollar, increased inflation, and higher interest rates. The US might need to implement monetary and fiscal policies to counteract these effects and stabilise its economy.
While the immediate effects of these events on the US dollar and inflation might be limited, they are indicative of a larger trend that could have significant long-term implications. The US will need to strategically navigate this evolving landscape to maintain economic stability and address potential inflationary pressures.
Here is some further reading here and elsewhere on this subject:
Two for the Price of One: De-dollarise and Reduce American Hegemony
De-dollarization Picks up Pace Amid Bigger Yuan Role
Dedollarisation and Reducing Dollar Hegemony Following the Russian Military Operation in Ukraine
Dedollarisation is Really Happening Now
60 Page Forum Discussion on De-dollarisation
I’ve said before that it is in the interests of many countries to de-dollarise and by so doing, clip the wings of the US. Hopefully, it will reduce US aggression, regime changes and wars around the world. And having hyperinflation at home might just stop the US meddling further in Russia and China’s interests.