Hegemony is in the reserve currency issuer’s DNA.

The uncomfortable truth for emerging markets, and others who rail against dollar dominance is that the country with a viable, alternative reserve currency to the dollar will behave exactly like America has done these past few decades.

Or it could be a tech disruption, via one of the many private sector-led cryptocurrencies and stable coins, whose rise global central banks have desperately attempted to curtail and control. This may well include the yuan, if President Xi is prepared to give up control over where the currency is traded. Finally, and this directly speaks to Lula and Kotak’s complaint, the dollar is ubiquitous in the global economy and while emerging countries and companies have to bear the exchange rate risk, the depth, availability, and liquidity of dollar-denominated markets remains formidable.Īll of this does not mean that dollar dominance is pre-ordained, as countries will tire of American currency exceptionalism and hunt for viable long-term alternatives. China has been attempting to peel away by offering to settle oil imports from Russia and the GCC in its currency, but it is arguable whether the Saudi central bank will want to substantially increase its yuan holding, particularly since it cannot be used to buy trophy assets in London or New York. Second, an overwhelming portion of global trade and payment transactions (including commodities like oil) are still denominated in the dollar. During times of trouble, perversely including America’s own recent ructions concerning regional banks which spooked global markets, investors turn toward the dollar for protection. First, the dollar, and the pound before it, is a true safe haven currency. What makes the dollar the dominant and attractive reserve currency today are three compelling factors. Whether emerging markets like it or not, the dollar will remain the only game in town for the foreseeable future. While the use of the yuan in international transactions has been rising, it still modestly accounts for less than 2% of global payments and around 4% of global trade finance, according to SWIFT (Society for Worldwide Interbank Financial Telecommunication).

Those plans have evaporated due to President Xi’s command-and-control leadership approach. The hunt for alternatives has included calls for creation of a “BRICS currency,” which presumably would allow emerging markets to trade and invest in a basket of of their own currencies, or to encourage the use of the yuan, the Chinese currency which in the pre-Xi Jinping era briefly harbored ambitions of becoming a viable reserve currency. The weaponization of the dollar has sent a collective chill across many emerging markets with political and business leaders in the largest of those economies, notably Brazil, Russia, India, China and South Africa (the famous BRICS grouping) doing some public soul-searching.

Brutal by Uday Satpathy