USD under siege - a paradigm shift in global currency dynamics
For half a century, the US dollar or USD's dominance (~80% of the global trade is settled in USD) as the world's reserve currency has been largely unchallenged, bolstered by a global mandate for crude oil transactions in dollars. Through these petrodollar agreements, the US mandated oil trade in the form of USD, in return for which the respective countries were assured military security by the US government. These contracts not only helped the USD to maintain its significance in international trade but also helped the US government to fund its cumulative fiscal deficit of ~US$1.6tr through dollar sinking in its treasury from the oil trade. However, the geopolitical landscape is rapidly evolving. Recently, Saudi Arabia's decision to not renew its petrodollar contract with the US and integration into a China central bank digital currency project marks a significant departure from this norm, signaling a strategic shift away from the dollar. It must be noted that on the one hand, banks are already sitting with all-time high T-bill reserves and on the other, the US citizens are avoiding investing in T-bills due to low interest rates. As a result, the US Federal Reserve would literally be left with no other option than printing more money to fund its deficit, leading to slow value erosion.
Congressional sanctions spur global de-dollarization
Congressman Thomas Massie's recent insights on Tucker Carlson's podcast highlight a crucial dynamic: US sanctions are inadvertently accelerating the decline of the dollar's dominance. Mr. Massie emphasized that sanctions on Russia reduced the dollar's share of transactions from 70% to less than 20%, demonstrating the global pivot towards alternatives. Similarly, sanctions targeting China's microchip industry have spurred a rapid expansion of China's domestic capabilities, narrowing the technological gap in just a few years. This trend of sanctions backfiring is further evidenced by the international backlash against the weaponization of the dollar, particularly highlighted by the controversial decision to repurpose frozen Russian assets to fund Ukraine.
BRICS rising - paving the way for a New Global Financial Order
The BRICS payment system is designed to empower developing nations by facilitating trade in local currencies, free from US sanctions and external political pressures. Additionally, BRICS nations' stance on Palestinian statehood and the opposition to unilateral sanctions illustrates their commitment to a multipolar world order. Saudi Arabia's contemplation of full BRICS membership further exemplifies this shift, enhancing the bloc's influence and accelerating the US dollar's decline. |
