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Don961: Business wars re-debate the need to reduce the role of the dollar

– 13 Hours Ago

Malaysian Prime Minister Mahathir Mohamad’s call for a single currency for East Asian countries is not a passing story, regardless of the possibility of achieving it, and it highlights many attempts to reduce the role of the dollar, led by China, mainly through bilateral currency trading.

LONDON (Reuters) – The expansion of US trade wars, especially with China and the European Union, could weaken the dollar as a global reserve currency and boost efforts to shed the dollar as a currency, according to international reports.

US sanctions on Iran, Venezuela, North Korea and Russia could also reduce the use of the dollar in its dealings with other countries in the world.

Malaysian Prime Minister Mahathir Mohamad’s proposal this week to issue a single trade currency for the East Asian region linked to gold has highlighted much of the effort to reduce the dollar’s dominance of the global financial system.

Regardless of the possibility of finding a consensus among East Asian nations because of their foreign alliances, especially their proximity to Washington, it seems a practical step because the proposed currency will be used only to settle imports and exports.

“If you want a rapprochement in the Far East, we have to start with a single currency, which is not used in local transactions, but for trading purposes only and must be tied to gold because it is more stable,” Mahathir Mohamad told a conference in Tokyo.

The proposed currency was an urgent necessity because the current foreign exchange system allowed currencies to be influenced by external factors and subjected to speculations and manipulation.

China has already proposed a major step in this direction at the height of the global crisis in 2008 and has issued a global reserve currency between central banks under IMF supervision after reform and reduced US hegemony over it.

But that proposal was difficult to implement because Washington could not accept it, but it threw a flaming ball that has since been rolling in the financial circles without the possibility of its implementation, despite the consensus of experts that the dependence of the global financial system on the dominance of the dollar is unsustainable.

62 percent of the dollar’s share in global reserves versus 2.5 percent of the Chinese currency at the end of last year

China has since gone a long way in easing its dependence on the dollar by expanding deals with many of its trading partners in the second currency.

Bilateral agreements have been signed in this area with many countries in Africa, Latin America, Asia and Eastern Europe, as well as many Arab countries such as Saudi Arabia, Egypt and North African countries.

Mahathir Mohamad linked the Malaysian ringgit to the dollar at the height of the Asian financial crisis in the 1990s, at $ 3.8, and imposed controls on capital flows, but stopped the linkage in 2005.

At the beginning of this month, the US administration signaled a blacklist of manipulative countries in the value of its currency, referring to its repeated accusations that China has devalued its currency for unfair trade gains.

The US Treasury Department said this week that it had found no big trading partner whose practices required listing on currency manipulators, but listed Malaysia and China on a list of nine countries that require close monitoring.

The Investec Fund, which manages assets worth $ 134 billion, confirmed this week that US trade and sanctions have led to “a decline in the use of the dollar as the official currency” at a time when countries are increasingly seeking to reduce their exposure to the dollar.

The rise of the renminbi (RMB) is the “story of the next session” of the global financial system due to political, economic and structural changes, the Financial Times reported.

The Investec Fund refers to structural shifts in China, which prefer to finance the current account deficit by issuing sovereign bonds in their own currency, rather than the US currency.

According to statistical research conducted by the Morgan Stanley Bank, the Chinese currency exceeded the euro to become the second largest currency bloc in the world, after the dollar.

Research conducted by the IMF using an IMF analysis of currency movements that define the mass of financial reserves shows that the renminbi now accounts for 28 percent of world GDP, up 8 percent from the dollar.

The rising interest in the renminbi comes as Beijing’s efforts to internationalize its currency have declined since the collapse of China’s stock market in 2015, triggering a sharp sell-off in the renminbi and stricter capital restrictions in a bid to stem outflows from China.

The share of the Chinese currency from cross-border payments, based on SWIFT, was around 2.8 percent in August 2015 before halving in the next two years.

But currency blocks do not reflect their share as a global reserve currency, as IMF data indicate a continued dominance of the dollar, which accounts for 62 percent.

Although China’s share of global foreign exchange reserves rose to a record high, it did not exceed 2.5 percent at the end of last year, “after excluding China’s own reserves” from 1.5 percent at the end of last year.

The Chinese currency ranks fifth after the euro with 20.5 percent, followed by the Japanese yen by 5.2 percent and the British pound by 4.4 percent.

The historical dominance of the dollar was due to the 1970s when the settlement of oil bills in dollars, which became known as the petrodollar, was consolidated, reinforcing the dollar-based trade and financing network.

“China now prefers to settle its trade bills with its own currency,” said Philip Saunders, co-chairman of Investc Fund. Agreements have been signed with major producers such as Russia and Saudi Arabia to accept the renminbi as payments for Chinese oil imports.

“An increasing number of producers have accepted the system, and that would have a significant impact,” he said. He also pointed to last year’s disclosure of renminbi-denominated oil futures on the Shanghai International Energy Exchange.

“All the central bank officials I met last year asked me how to get out of the dollar,” said Hayden Prisco, head of fixed income for Asia and the Pacific at UBS.

He pointed to data showing that the renminbi is now trading in London at higher levels than the pound sterling.

Reports by Investec and UBS indicate a rapid shift away from the dollar by many countries, such as Russia, which have favored the Chinese currency following US sanctions, boosting the trend toward multi-polarization.

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