Is it curtains for the American dollar?
More and more countries around the world are using their own currencies for international trade instead of the greenback. That means United States companies doing business overseas get exposed to the nuances of foreign-exchange rates, says economist Barry Eichengreen, writing in The Wall Street Journal. As the dollar’s status as the world’s de facto currency fades, he adds, foreign investors will also be less eager to lend our government money.
Iran and Turkey are the latest to announce plans to stop converting their trade into U.S. dollars and simply use their own currencies in bilateral transactions. The move will save both countries the hassle and expense of turning their money into American cash.
Moreover, international sanctions against the government of Mahmoud Ahmadinejad have meant it is increasingly difficult for Iran to trade in dollars and euros. Iran is coming to depend more and more on Turkey as an economic partner. The Turks are currently Iran’s fifth-biggest customer for oil.
Turkey’s deal with Iran follows similar agreements with Russia and China.
The dollar’s not what it used to be
The U.S. dollar has been the world’s dominant currency since 1944. Many countries keep large reserves of American cash, giving the U.S. Treasury, the Federal Reserve and Wall Street an outsized role in international finance. But when the global economy crashed in 2008, the value of the dollar went down with it. In 2010, a UN report argued that the dollar was too unstable to serve as an international standard currency.
China, naturally, is trying to fill the gap. A whirlwind series of currency deals suggest that China is serious about internationalizing the yuan. This year alone, China has ditched the dollar in its trade agreements with Brazil, Australia and the United Arab Emirates, all rising economic stars. It’s working on a similar proposal with Japan.
Russia and China have been trading with rubles and yuan since 2010.
One bling to rule them all?
Still, despite the dollar’s decline, it’s not going away anytime soon. The Wall Street Journal reports that even now, nearly 85 percent of foreign-exchange transactions involve the U.S. dollar, 39 percent are for euros and the yuan comes in third at 19 percent.
Instead of one big player, we’re likely looking at a world with multiple dominant reserve currencies. And there’s a chance the yuan’s challenge could fade if the U.S’s economy revives. Anyone remember when Japan’s yen was all set to take over global trade in the 1980s?
Of course, there are some countries that still appreciate the value of a dollar. In Zambia, for one, businesses have been resisting a new law that forces them to quote prices in the local currency, the kwacha, instead of dollars.
Finally, Zimbabwe saved itself from hyperinflation by adopting U.S. dollars. But now the country is running into an unexpected problem: a buck fifty can buy a basket-full of tomatoes in this desperately poor African nation, but no one has the coins to make change.