Thinking of dethroning the US dollar? Think twice

AS China and Russia are working hard hand in hand to bypass the US dollar, doubts arose as to whether that would really happen and if so, when.

Lots of people reading about the current currency war widely reported online made lots of comments in a way that they are hopeful the US dollar could be dethroned.

China and Russia had just made their moves with Moscow and Beijing joining forces in order to bypass the US dollar in the global markets and shifting to gold system.

They thought that the greenback may drop substantially in value over time as tons of US dollars have been printed out into the market without any gold backing as reserves.

China and surprisingly Japan as the top two major creditors of US holding trillions of dollars in US government bonds, had been selling more of such bonds lately and using the dollars to buy assets and companies in US instead of holding the greenback.

In order to bypass the dollar in the global monetary system and to phase-in a gold-backed standard of trade, the Russian central bank opened its first overseas office in Beijing on March 14, marking a step forward in forging a Beijing-Moscow alliance.

The new central bank office was opened at a time when Russia is preparing to issue its first federal loan bonds denominated in Chinese yuan, a move that was widely viewed as intended to eventually test the global reserve status of the US dollar.

Also Russia – the world’s fourth largest gold producer – is expected to become a major supplier of gold to China, the probability of a scenario hinted by many that Beijing is preparing to eventually unroll a gold-backed currency.

But to get out of the dollar is not that easy as Russia could be blocked from the SWIFT system which provides secure worldwide interbank financial telecommunication for financial transfers. Both Russia and China are working out an alternative system just in case they are blocked from SWIFT.

However, Somkiat Osotsapa, a lecturer at the Faculty of Economics, Chulalongkorn University, just wrote on his Facebook page, saying dethroning the US dollar is unlikely to happen in the foreseeable future if not possible at all.

He said major currencies are used in four major areas.  First as trade financing. In this area, the US dollar controls about 81%, a decline from 86% five years ago. Chinese yuan ranks second at 8.6%, euro third at 6.6% while the remaining is in Japanese yen.

Secondly, they are used in international financial transactions like moving funds to deposit at places where interest rates are high, speculate on foreign exchange and stock investment for example. This area is mostly controlled by the dollar. Yuan ranked 12th or just a bit over one percent.

Thirdly, they are used in borrowing, like if Thailand wanted to issue bonds, it has to choose which currency to be denominated and in this area around 90% is in the form of US dollar.

And lastly, they are used as international reserves. Most of Thailand’s reserve is in the form of US dollar.

 He pointed out that all in all, the yuan is still far, far behind the dollar and it’s very difficult to catch up because US has tremendous power to back up its currency.

First the US has a power to forbid any country from using its currency as trade financing and if that happened it means a disaster to that country.  Any company, no matter the nationality, breaching the US order would be sanctioned, asset confiscated and fined.

Secondly, he said, US can forbid the use of American banking services no matter that it be foreign exchange, deposit or transfer of funds. Foreign banks which are doing transactions with the country sanctioned by US would be forbidden from doing transactions with US banks and are forbidden from having a branch in US.

Thirdly, they would be forbidden from using US transports be it airplanes, ships or US firms like Fedex.

Fourthly, the assets of foreign firms located in US would be frozen. Fifthly, they would be prevented from borrowing funds in the international market.

He said in sum there are over 20 measures US has in hand but just five above is more than enough to make anyone bankrupt.

He said it took US forty years to replace the UK pound. So it would take any currency a long, long time to topple the US dollar.

However, another banking source said the more formidable foe against the US dollar are not the yuan, ruble or yen. It is a cryptocurrency called Bitcoin.

He claimed US has been trying hard to destroy Bitcoin but failed.

Credit Suisse said it is not so far a mainstream currency and yet it would be unwise to ignore it. Some $14.9 billion worth of Bitcoins were in circulation in January 2017, and blockchain, the technology underpinning Bitcoin, has attracted plenty of attention for its disruptive potential in banking and trading system.


Top: A heap of US dollars which is backed by tremendous power. Photo: Tracy O (CC-BY-SA-2.)

By Kowit Sanandang






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