Suddenly Everyone Is Hunting for Alternatives to the US Dollar

(Bloomberg) — King Dollar is facing a revolt.

Tired of a too-strong and newly weaponized greenback, some of the world’s biggest economies are exploring ways to circumvent the US currency.

Smaller nations, including at least a dozen in Asia, are also experimenting with de-dollarization. And corporates around the world are selling an unprecedented portion of their debt in local currencies, wary of further dollar strength.

No one is saying the greenback will be dethroned anytime soon from its reign as the principal medium of exchange. Calls for “peak dollar” have many times proven premature. But not too long ago it was almost unthinkable for countries to explore payment mechanisms that bypassed the US currency or the SWIFT network that underpins the global financial system.

Now, the sheer strength of the dollar, its use under President Joe Biden to enforce sanctions on Russia this year and new technological innovations are together encouraging nations to start chipping away at its hegemony. Treasury officials declined to comment on these developments.

“This will simply intensify the efforts in Russia and China to try to manage their part of the world economy without the dollar,” said Paul Tucker, a former deputy governor of the Bank of England in a Bloomberg podcast.

Writing in a newsletter last week, John Mauldin, an investment strategist and president of Millennium Wave Advisors with more than three decades of markets experience said the Biden administration made an error in weaponizing the US dollar and the global payment system.

“That will force non-US investors and nations to diversify their holdings outside of the traditional safe haven of the US,” said Mauldin.

Bilateral Payments

Plans already underway in Russia and China to promote their currencies for international payments, including through the use of blockchain technologies, accelerated rapidly after the invasion of Ukraine. Russia, for example, began seeking remuneration for energy supplies in rubles.

Soon, the likes of Bangladesh, Kazakhstan and Laos were also stepping up negotiations with China to boost their use of the yuan. India began talking up more loudly the internationalization of the rupee and just this month, started securing a bilateral payment mechanism with the United Arab Emirates.

Progress however appears to be slow. Yuan accounts haven’t gained traction in Bangladesh for example due to the nation’s wide trade deficit with China. “Bangladesh has tried to pursue de-dollarization in trade with China, but the flow is almost one-sided,” said Salim Afzal Shawon, head of research at Dhaka-based BRAC EPL Stock Brokerage Ltd.

A major driver of those plans was the move by the US and Europe to cut off Russia from the global financial messaging system known as SWIFT. The action, described as a “financial nuclear weapon” by the French, left most major Russian banks estranged from a network that facilitates tens of millions of transactions every day, forcing them to lean on their own, much smaller version instead.

That had two implications. First, the US sanctions on Russia stoked concern that the dollar could more permanently become an overt political tool — a concern shared especially by China, but also beyond Beijing and Moscow. India, for example, has been developing its own homegrown payments system that would partly mimic SWIFT.

Second, the US decision to use the currency as part of a more aggressive form of economic statecraft puts extra pressure on economies in Asia to choose sides. Without any alternative payments system, they’d run the risk of being compelled into compliance with, or enforcement of, sanctions they may not agree with — and losing out on trade with key partners.

“The complicating factor in this cycle is the wave of sanctions and seizures on USD holdings,” said Taimur Baig, managing director and chief economist at DBS Group Research in Singapore. “Given this backdrop, regional steps to reduce USD reliance are unsurprising.”

Just as officials across Asia are loath to pick a winner in US-China tussles and would prefer to keep relations with both, the US penalties on Russia are pushing governments to go their own way. Sometimes the action takes a political or nationalist tone — including resentment of Western pressure to adopt sanctions on Russia.

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