In mid-March, analyzing the consequences of the war in Ukraine, the International Monetary Fund (IMF) warned of a fundamental change in the global economic and geopolitical order. The institution highlighted in particular the change in the energy trade, the reconfiguration of supply chains which was already at work since the Covid-19 pandemic but also the fragmentation of payment networks and the evolution of distribution of foreign exchange reserves of each country where the dollar dominates.

Indeed, the blocking of some 300 billion dollars of Russia's reserves by Western countries after that of 9.5 billion dollars of Afghanistan's reserves have made emerging countries aware of the risk of depending too much on the greenback. .

This awareness does not date from last February and it does not have its origins in geopolitical considerations alone. According to the latest figures from the International Monetary Fund (IMF), the dollar represented nearly 59% of global foreign exchange reserves at the end of 2021 (see graph). Although it remains in the majority, its share has been decreasing since 1999, where it represented 71% of foreign exchange reserves global. Although the creation of the euro contributed to this decline, it did not replace it, the share of the single currency increasing from 19% to 21% during this period. As for other international reference currencies such as the yen and the pound sterling, their share is also decreasing slightly.

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Foreign exchange reserves

Diversification

It has actually been since 2010, after the global financial crisis of 2008 triggered in the United States by “subprimes”that a movement to diversify reserves has begun in favor of other currencies such as the Australian dollar, the Canadian dollar, the Swiss franc, but also the yuan (or renminbi), the Chinese currency.

Between 2020 and 2021, its share jumped by 23.7%. Even if it remains modest, representing barely 2.8% of world reserves at the end of 2021, it is increasingly becoming an alternative to the dollar and the euro, and not just for emerging countries. The Bank of Israel recently unveiled a new strategy for its reserves which total more than $200 billion. Since the start of the year, it has started to reduce the share of dollars to increase its allocations to Australian dollars, Canadian dollars, yuan and yen in its portfolio »underlined at the beginning of the month the American economist Barry Eichengreen, who since 2011 has predicted the decline of the dollar in his best-seller An exorbitant privilege ».

Indeed, in 2021, the United States represented in value only 8.1% of international trade and 15.7% of world GDP compared to 15% and 18.6% respectively for China. The modest role of the yuan therefore does not reflect the economic weight of the second largest economic power in the world. The reason is that the Chinese currency is not a floating currency on the international foreign exchange market where the value is fixed by supply and demand (this was the case with the ruble until the invasion of Ukraine). It is set by the central bank of China which also exercises capital control, depending on the interests of the Chinese economy and the international situation. Concretely, any holder – country or company – of yuan is constantly threatened by a brutal devaluation and by the limitation of freely using this currency for payments.

The use of the dollar but Canadian or Australian

The fact remains that the growing role of the Chinese currency, like other currencies, is playing out to the detriment of the dollar. Currencies from smaller economies that did not usually feature prominently in foreign exchange reserve portfolios, such as the Canadian and Australian dollars, the Swedish krona or the South Korean won, account for three-quarters of the currencies that have replaced each other. to dollars in 2021 »underlines Barry Eichengreen.

However, the choice of the yuan also turns out to be a political choice. At the end of 2021, two months before Moscow's decision to invade Ukraine, Russia's central bank concentrated 105 billion of the 306 billion yuan stored in the vaults of central banks around the world, or just under 'a third. In Russia's eyes, Beijing's political control over its currency and its independence from the United States allows it to protect itself and resist Western sanctions, which is less the case for other major currency-holding countries. yuan which are in order Brazil, Switzerland and Mexico.

The desire to depend less on the dollar is also found in trade. The announcement two weeks after the start of the war in Ukraine of oil sales contracts from Saudi Arabia to China denominated in yuan had more than a symbolic value in relation to the petrodollar system. It introduces diversification into international trade, largely dominated by the dollar for decades and making economies, particularly emerging ones, dependent on the fluctuation in the value of the greenback and its consequences on exchange rates. A situation summed up by the famous response of John Connally, Richard Nixon's Treasury Secretary, to his European counterparts in 1972: “The dollar is our currency, but it’s your problem”.

The euro, second behind the dollar

Because around 40% of cross-border payments in the world are still made in dollars compared to barely 2.7% for the yuan. The euro is used at 36.6%, the pound sterling at 5.9% – more than double the use of the yuan despite being a much smaller economy – and the Japanese yen is used as much as the yuan at 2.6%. On the other hand, in financial transactions, the dollar is widely present, at 80%.

The war in Ukraine, here too, is also changing positions. Since Western states banned Russia from the SWIFT payment system, emerging countries are turning to alternatives. Thus, China, which had implemented an alternative payment system, CIPS, since 2015, should move closer to the SPFS (Financial Message Transfer System) messaging system developed by Moscow following the threats of its exclusion from SWIFT which followed. its annexation of Crimea in 2014. Launched in 2017, SPFS uses technology similar to SWIFT and CIPS. Its current development aims to reduce the share of trade in dollars here too.

The other problem posed by the domination of the dollar is the fluctuation of its value and its consequences on the exchange rates of countries, particularly emerging ones, which force their central banks to use their reserves to maintain the value of their currency. In 2010, Brazil accused Uncle Sam of leading a currency war » because the Fed's monetary easing had caused the value of the dollar to melt and other currencies including the real to appreciate, which increased the price of Brazil's exports which became less competitive, and hampered its growth.

The problem with dollar-denominated debt

Today, it's the opposite. Many other countries, particularly emerging countries, are bearing the brunt of dollar movements, not only on their trade if a large part of their imports are denominated in dollars but also in terms of external debt if, as is the case in general, it is also denominated in dollars », points out Steven Barrow, at Standard Bank. Indeed, the dollar not only appreciated by more than 14% against a basket of currencies including the euro, the yen, the pound sterling, the Swedish krona, the Canadian dollar and the Swiss franc (see graph)but 90% against the Turkish lira, 10% against the South African rand, 26% against the Chilean peso, 6% against the Brazilian real, but only 3.5% against the yuan.

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Dollar index

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This strengthening accompanied by the rise in the Fed's key rates not only generates fluctuations for exports (raw materials for emerging countries, with risk of imported inflation) and imports (increase in the price of oil or wheat), but also has consequences for countries indebted in dollars, which see the cost of their repayments mechanically increase.

This phenomenon, added to the destabilization caused by disruptions in supply chains and the consequences of the war in Ukraine, further increases the uncertainties and fragilities of countries, particularly emerging ones. Faced with this situation, countries are seeking to diversify their assets and the currency of their exchanges to avoid excessive dependence, particularly on the United States. And this is ultimately what characterizes this deglobalization, the return of risks and uncertainties!

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