The way in which, for example, the Biden administration has weaponised the dollar as an instrument of economic sanctions is causing a rise in the use of the yuan and other local currencies to settle cross border trade, all at the expense of the dollar.
This multifaceted erosion of US dollar strength, which is still creeping at this stage but prone to potential acceleration, is being reflected in the current surge in the price of gold. The precious metal recently touched an all-time high of more than US$2,500 per ounce, partly under the influence of Asian and Russian buying.
It is not just the fact that US interest rates are set to fall which could set the dollar on a slippery slope. According to Paul Sheard, a Harvard economist and author of the book The Power of Money, the “exorbitant privilege” the dollar enjoys is “not God-given”.
The term “exorbitant privilege” refers to the benefits the United States derives from having its own currency hold global reserve status. This implies, for instance, that the US will not face a balance of payments crisis because its imports are purchased in its own currency.
This privilege is coming under increasing threat, however, as Washington resorts to freezing Russian and other foreign assets held in US dollar form to bolster the armoury of trade-restricting weapons it employs, ranging from trade tariffs to restraints on investment in the name of economic security.
Sheard is not alone in sounding warnings about how this weaponisation could further erode the foundations of the world’s principal reserve and transaction currency. US dollars might carry the words “In God We Trust”, but how long will trust in the currency itself persist?
During the recent expert panel discussion I moderated at the FCCJ, Sheard was joined by Tran and others in suggesting that geopolitical rather than economic factors could hasten a decline and fall of the US dollar with global and manifold repercussions.
Given this situation, is it wise for US policymakers to weaponise the dollar and the US financial and banking systems for geopolitical purposes? Should they not instead preserve the sanctity of financial contracts and financial markets and protect them from pernicious influences?
01:31
Chinese consumers sell off old jewellery amid record high gold prices
Chinese consumers sell off old jewellery amid record high gold prices
The freezing of Russian foreign exchange reserves, for example, was a “bridge too far” in the view of some panellists that “sets in train processes around the world that ultimately could lead to an erosion of the dominant position of the dollar”.
The tendency for the US to rely increasingly on sanctions and tariffs as its policy of first choice to achieve political and strategic objectives is also something that causes some countries to want to distance themselves from the dollar.
Instead, there is an increasing interest in gold. What J.P. Morgan has referred to as “gold’s blistering rally this year” is in part a result of this shift, which has seen a breakdown in gold’s relationship to other assets such as the dollar and with US interest rates.
During the past 20 years, the US dollar has declined as a share of global foreign exchange reserves, according to an Atlantic Council paper. This has not benefited any other major currency but rather a group of smaller currencies including the Canadian and Australian dollars and the yuan.
The International Monetary Fund monitors the composition of currencies in global foreign exchange reserves, and its most recent survey shows the share of the US dollar at 58 per cent of total official foreign exchange reserves at the end of the first quarter of 2024, a noticeable fall from 71 per cent in 2000. If gold is included in the reserves, the dollar’s share drops to 48 per cent.
An employee opens a safety deposit box containing a gold bar at The Reserve vault in Singapore, on July 29. The Reserve, an enormous vault for storing precious metals, opened in June to cater to increased demand from the world’s uber wealthy for high-security storage. Photo: Bloomberg
In 2022 and 2023, central banks bought more than 1,000 tonnes of gold per year. The rise in purchases has been spearheaded by the central banks of China and Russia, followed by several emerging-market nations including Turkey, India, Kazakhstan, Uzbekistan and Thailand.
In particular, the People’s Bank of China has raised the share of gold in its reserves from 1.8 per cent in 2015 to a record 4.9 per cent today while cutting its holdings of US Treasuries from US$1.3 trillion in the early 2010s to US$780 billion in June this year.
As geopolitical confrontation deepens, the declining share of the US dollar in global reserves is likely to persist. In short, there is no need to talk down the dollar. The conversation is already well advanced among central banks, markets and investors, and it seems that gold has nowhere to go but up.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs
.jpg?itok=EbVWo-Ha)
