What will happen with the U.S. Dollar?

By Gregory Simpkins

For more than a year now, the BRICS (Brazil, Russia, India, China, South Africa) coalition has been pressing hard for replacement of the dollar as the world’s reserve currency. As I stated in an earlier article, there are several reasons why the U.S. dollar has come under attack by other countries.

The shortage of dollars has damaged the economies of countries such as those in Africa. Additionally, the withholding of the dollar as part of sanctions packages and secondary sanctions on those who do business with sanctioned parties have had unintended consequences, such as with the Russia sanctions that interfered with shipments of Russian and Ukrainian grain and fertilizer to developing countries that were tremendously hurt by them even though they were not the primary targets.

Russia, and its ally China, have led the campaign to undercut the dollar and have worked diligently to replace it as the reserve currency. However, this effort may be more difficult than it would seem. According to Schiff Sovereign, a wealth management company, there are inherent challenges to any of the contending countries to take over from the United States in fielding a new reserve currency. According to the company:

• China has a massive population and a huge economy. But it too has way too many problems… with the obvious challenge that no one trusts the Communist Party. So, most likely China will not be the dominant superpower.
• India’s economy will eventually surpass China’s, and it has an even bigger population. But India is not even close to the ballpark of being the world’s superpower.
• Then there’s Europe. Combined, it still has a massive economic and trade union. But it has also been in major decline…with multiple social crises like low birth rates and a migrant invasion.
• Then there are the energy powers like Russia, Iran, Saudi Arabia, and Indonesia; they are far too small to dominate the world, but they have the power to menace and disrupt it.

“The bottom line is that the U.S. is no longer strong enough to lead the world and keep adversarial nations in check. And it is clear that other countries are already adapting to this reality,” the company states.

“This would have been unthinkable a few decades ago. But today the rest of the world realizes that they no longer need American funding, leadership, or expertise.”

Market Insider, a financial web site, stated in a May 13, 2024 article that there are three primary reasons why the replacement of the dollar will not be successful in the short run:

• The Chinese Yuan, which officials in Beijing have been trying to position as a challenger to the dollar on the world stage, isn’t liquid enough to truly disrupt the dominance of the greenback, the strategists said. That’s partly due to strict capital controls China has on its currency, which limit the amount of cash that can be taken in and out of the country.
• Dollar doomsayers say trust is waning in the greenback as concerns mount over the United States’ rising debt balance. As of this year, the government has racked up more than US$34 trillion in debt, a record amount. Yet, that has little impact on trust in the dollar, given the currency’s long-running reputation as a highly-liquid safe-haven asset.
• While cryptocurrencies like bitcoin are liquid, they are considered too volatile to be considered a true alternative to the dollar. “If I’m holding a crypto coin that rises, say, 10 percent a month, I’m less likely to use that for trade and instead just hoard it in my wallet to benefit from its price appreciation,” says David Adams, Morgan Stanley’s head of G10 FX strategy in the Market Insider analysis. “Now, reasonable people can disagree about whether cryptocurrencies are going to appreciate or depreciate, but I’d argue that the best outcome for a dominant currency is neither.”

(The) raising of interest rates by the U.S. Federal Reserve is pushing nations like China and Russia to adopt settlement systems that do not rely on the dollar. Besides China and Russia, 41 other countries are now following suit, perhaps concerned with the way the U.S. has treated Russia during its conflict with Ukraine.

Pros and Cons of a Strong Dollar

Investopedia, an investment analysis web site, reports that there are advantages and disadvantages for a strong dollar for Americans:

• Traveling abroad for Americans finds the strong dollar provides more purchasing power. Because local prices in foreign countries are not significantly influenced by changes in the U.S. economy, a strong dollar can buy more goods when converted to the local currency. But a strong dollar also means that visitors from abroad will find the prices of goods and services in America more expensive. Business travelers and foreigners living in the U.S. but holding on to foreign-denominated bank accounts, or who are paid incomes in their home currency, will see their cost-of-living increase.
• Goods produced abroad and imported to the United States will be cheaper if the manufacturer’s currency falls in value compared to the dollar. Luxury cars from Europe, such as Audi, Mercedes, BMW, Porsche, and Ferrari, would all fall in their dollar price. However, just as imports become cheaper at home, domestically produced goods become relatively more expensive abroad. An American-made car that costs US$30,000 would cost €22,222 in Europe, with an exchange rate of US$1.35 per euro; however, it increases to €26,786 when the dollar strengthens to US$1.12 per euro. Some have argued that expensive exports can cost American jobs.
• A strong dollar bolsters the dollar’s status as a world reserve currency. While some countries, including Russia, Iran, and China, have questioned the status of the U.S. dollar as the de facto world reserve currency, a strong dollar helps keep its demand as a reserve high. Yet, foreign governments that require U.S. dollar reserves will end up paying relatively more to obtain those dollars. This is especially important in emerging market economies because it reduces the profits of exporting businesses in those economies. That only increases the resentment currently fueling the de-dollarization campaign.

In a February 23, 2023 interview at the Deutsche Goldmesse conference with the Soar Financially YouTube channel, Matthew Piepenburg, a partner at emerging markets-focused Matterhorn Asset Management, says that economic powerhouses are now clearly attempting to “break ranks” with dollar supremacy. He says that the raising of interest rates by the U.S. Federal Reserve is pushing nations like China and Russia to adopt settlement systems that don’t rely on the dollar. Besides China and Russia, the family office guru says that 41 other countries are now following suit, perhaps concerned with the way the US has treated Russia during its conflict with Ukraine.

“So, when that dollar gets higher, because (Federal Reserve Chairman Sydney) Powell is raising the rates, that becomes more onerous and painful for the rest of the world and they begin to break ranks. Asia in general, China and Russia in particular are very big rank-breaking nations. And, of course, they’re bringing 41 other countries alongside to have trade settlements outside the dollar,” Piepenburg said.

Some developing countries are trying to facilitate the use of their own currencies in commercial transactions, backed by gold, rather than using the dollar. If the BRICS coalition can’t effectively rally other countries to its proposed alternative currency, but their efforts do weaken the dollar internationally, that likely would create a chaotic economic situation where there is no accepted reserve currency. It’s beginning to look like the de-dollarization effort has sown the wind but may reap the whirlwind.

As for Americans, their hard-earned savings, investments, retirement plans are all vulnerable to the dollar’s instability. So, while there is great incentive for the United States to negotiate a mutually beneficial result here, there may not be the willingness among other nations to make that effort.

Gregory Simpkins, a longtime specialist in African policy development, is the Principal of 21st Century Solutions. He consults with organizations on African policy issues generally, especially in relating to the U.S. Government. He further acts as a consultant to the African Merchants Association, where he advises the Association in its efforts to stimulate an increase in trade between several hundred African Diaspora small and medium enterprises and their African partners.