While rumours of the dollar’s imminent demise may be greatly exaggerated a growing body of investors and business people are increasingly calling for an alternative to the greenback’s global hegemony.
While the dollar still rules the roost as the global reserve currency of choice — and by extension the preferred medium of exchange for international trade — recent proposals for an alternative, including a gold-backed emerging markets alternative, may not be as half-baked as they first appear.
“For all intents and purposes the international foreign exchange market is the dollar market,” says Rashaad Tayob, a portfolio manager at Foord Asset Management. “But there’s a very strong desire across the world to counter the US’s global dominance. We may be in a dollar-based financial system but there is a strong desire to shift away from it.”
That much is clear from the Brics grouping of countries (Brazil, Russia, India, China and SA) having floated the idea of an emerging market-led alternative currency, which if recent media reports are to believed might be backed by gold. But even within the Brics alliance there is growing agreement that the project will be very difficult to get off the ground, despite at least 19 new members — ranging from Egypt, Indonesia and Ethiopia — having expressed interest in joining the bloc.
Russian central bank governor Elvira Nabiullina has already gone on record saying a proposed Brics currency will be “quite difficult to implement” while SA’s Leslie Maasdorp, vice-president of the New Development Bank, a Brics initiative, has called the project a medium to longer-term aspiration. The difficulties of supplanting the dollar are underscored by the greenback’s dominance of the global financial system.
Data compiled by Foord Asset Management, using sources such as Spectra Markets and the Bank for International Settlements, shows that since 1989 the dollar has been the counterparty on the other side of about 90% of all foreign exchange transactions. The greenback is also the dominant global reserve currency, accounting for about 60% of international foreign exchange reserves, followed by the euro at 20%, according to monthly data from Macrobond and Ivesco in September 2022.
However, Tayob says there are real reasons to start taking proposals for a dollar alternative more seriously. Chief among those is the US fiscal debt load, which hit $31.4-trillion in March 2023, leading to record high interest payments on Federal government borrowing thanks at least in part to the Federal Reserve’s aggressive rate hiking. US public debt is also expected to exceed 100% of GDP in the next year or two.
“People have been talking about the demise of the dollar for at least the last 20 years but the difference this time is that the US now has serious economic problems,” says Tayob. “I think there is strong evidence that the US empire is in decline. The question is whether you can maintain the value of your currency if you’re in economic decline.”
On the ground there is also growing concern about dollar hegemony in the wake of the US decision, along with its allies, to confiscate more than $300bn in Russia’s central bank foreign currency assets. Business Day spoke to two prominent Nigerian businesspeople about the complexities of transacting in dollars in the wake of the Russia-Ukraine conflict, which spelt out the mechanics of the challenges facing business people in Africa.
“We are operating ships in the Mediterranean and the Black Sea ... sometimes we come across profitable transactions but in the KYC [Know Your Customer] process we find the counterparty might have some link with Russia,” says Aminu Umar, CEO of Sea Transport Services Nigeria. “That makes it very difficult for us to conclude that transaction if it is dollar based because it puts you at risk of the possibility of the funds being confiscated from your system.”
Abdulwasiu Sowami, CEO of Prudent Energy Group, which operates in Nigeria’s downstream petroleum industry, says the prospect of being blacklisted for doing a dollar-denominated transaction with a counterparty that is not to the US’s liking is “the worst problem” for African businesspeople.
“Finding an alternative to the dollar is very important so it’s something that has to be looked into,” says Sowami. “I think it will be good for the world to have a balance but I think it’s going to be a struggle to make that happen.”
Tayob says the biggest challenge will be finding a viable alternative medium of exchange that also serves as a store of value and unit of account. Interestingly, he is rather dismissive of the Chinese yuan’s chances of emerging as a dollar replacement, calling it a “non-starter”.
“Do you know what the yuan-rand exchange rate is? And they’re the second biggest economy in the world and SA’s biggest trading partner. The yuan is very underwhelming as a global currency,” he says.
Instead he believes a “multicurrency” solution in which a gold-backed Brics currency plays a central role may actually be a viable solution despite bullion’s demonetisation in the Western financial system since the gold standard was abandoned in the early 1970s.
“Gold could be a real alternative — it’s already held by all the central banks ... and I’m sure Russia wishes it had kept its reserves in gold rather than in dollars,” he says. “If you take a Krugerrand to Singapore or Pakistan you can probably exchange it for local currency with a 2% transaction cost. That makes it probably a better medium of exchange than the rand. If you try to exchange R10,000 in cash in Singapore you’re probably going to get knocked at least 10% or 15% to exchange it into local currency or dollars — and that’s if you find someone willing to take it.”
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