Dollar divergence

Throughout this spring, some of Asia’s largest economies were holding conferences to promote the de-dollarization of international trade. They were not only seeking to increase economic prosperity and security, but in some cases specifically to avoid the risk of the weaponization of the dollar.

Those were the words of the President of Indonesia, Jako Widodo, who has long urged members of the Association of South East Asian Nations (ASEAN) to use credit cards issued by the banks of the member states to avoid “possible geopolitical repercussions,” as Widodo put it at an ASEAN meeting on March 30th.

“Be very careful. We must remember the sanctions imposed by the U.S. on Russia,” he said. Indonesia has a substantial economic upside. The relatively stable democracy is the world’s fourth most-populous nation, but ASEAN also contains Brunei, Cambodia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

At the conclusion of the two-day meeting, the ASEAN finance ministers and central bank governors released a joint statement, stating that they agreed to “reinforce financial resilience, among others, through the use of local currency to support cross-border trade and investment in the ASEAN region,” including by the use of a non-SWIFT international settlement system.

India, another large economy of Asia, recently entered into “advanced negotiations” over a free trade agreement, with Foreign Minister S. Jaishankar describing India’s relations with Russia as among “the steadiest” in the world. Since the war in Ukraine started, Russia has surpassed Iraq as India’s largest oil supplier, and the two countries have agreed to conduct the sales in rubles rather than dollars.

The US dollar has fallen in value by around 8.6% since September, with the WSJ referring to its recent highs late last year as a bubble. Currently, around half of all international transactions are conducted in dollars, and half of all international financing is done in dollars.

One of the ways in which King Dollar is losing command however is from the perspective of foreign currency reserves held in foreign banks. The dollar accounted for less than 60% of official foreign exchange reserves as of the second quarter of 2022. This is one of the lowest shares in the past 20 years and is well below the average of 65% for the period.

This is a major risk for the US economy. As countries begin trading in their own currencies, it will incentivize them to reduce the holdings of US dollars in exchange for other currencies. Those dollars, numbering in the trillions, would come back into the US economy and create inflation in the traditional sense—an increase in the supply of money and credit—that would further drive up the prices of goods and services in the nation that have already experienced rapid increases over the past year.

The rest of the world holds over $7 trillion in US public debt via interest-bearing securities like bonds and Treasury bills. Likely more exists out in the world through cash holdings, such that at least 20% of the total national borrowed money never entered the US economy. If and when it does, it will create a situation where too much money is chasing too few goods, driving prices up considerably. WaL

PICTURED ABOVE: Syrian President Bashar al-Assad. PC: 2.0. kremlin.ru

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