According to Russian media reports, in the first quarter of this year, the proportion of the US dollar in trade settlements between China and Russia has already dropped from the previous 90% to below 50%. Some predict that the move towards de-dollarization between China and Russia has already begun. Is this really the case?
In fact, not only in China-Russia trade, but also in China's bilateral trade with other countries, as well as in trade settlements between other countries, there has been a phenomenon of a decreasing proportion of the US dollar. Although these phenomena are currently isolated, with the decline of the US economy, the chaos in US politics, and the highlighting of multiple contradictions within the United States, the dominant position of the US dollar has also begun to waver due to the comprehensive decline in the United States' credibility. In this sense, "de-dollarization" may already be an irreversible trend.
The waning dominance of the US dollar is mainly due to the following two reasons:
1. The relationship between the US dollar and oil has loosened
Although the dominant position of the US dollar was established during the Bretton Woods system, this relationship was not sustainable, meaning the pegging of the US dollar to gold was unsustainable. In fact, what truly established the dominant position of the US dollar was the so-called "post-Bretton" period after the collapse of the Bretton Woods system, because during this period, the US dollar was pegged to a scarce resource - oil, which is known as the blood of industry. Gold is merely a limited means of payment, while oil is something you simply cannot do without. As a result, the status of the US dollar was not weakened by decoupling from gold, but was actually strengthened by its linkage to oil.
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The pegging of the US dollar to oil made the US dollar the only currency in the world with the function of hedging against devaluation risks, because those holding US dollars could hedge against the risks of dollar devaluation through oil futures. This was possible because there is a relatively strict negative correlation between the US dollar index and oil prices, meaning you could hedge against the risk of the US dollar index falling by going long on oil futures. It is precisely because of this hedging function that the US dollar has dominated the international monetary order, and the United States has also reaped great benefits and acted unilaterally through this dominant position of the US dollar, which is commonly referred to as "dollar hegemony."
However, the negative correlation between the US dollar and oil began to become unstable in 2008 and gradually showed "reversal" and "separation" over time. Under these circumstances, it has become very difficult, even nearly impossible, for those holding US dollars to hedge against dollar risks through oil futures. This has weakened the hedging function of the US dollar, thereby increasing the uncertainty of holding US dollars and shaking the dominant position of the US dollar.
2. The decline in the national credit of the United States
In recent years, the United States, relying on its unique advantages in technology, military, and the US dollar, has continuously strengthened its hegemonic position, which has been met with aversion from various countries. Especially since the COVID-19 pandemic, the US government has been inactive domestically and has been constantly shifting blame externally, with various "withdrawals" and threats emerging endlessly and acting arbitrarily. Under these circumstances, the national credit of the United States has been severely harmed, and this harm inevitably affects the US dollar.As mentioned earlier, the dominant position of the US dollar is due to its linkage with oil, but oil is by no means the only support for the US dollar. In fact, American credit is also a support for the dominant position of the US dollar. However, this kind of support cannot be formed independently and needs to be combined with oil to be demonstrated.
When American credit is no longer reliable, the status of the US dollar will inevitably be shaken. In addition, the linkage with oil mentioned earlier is also a mere formality. The combination of the two means that the dominant position of the US dollar is really not guaranteed.
Countries around the world are actually very entangled in the face of the shaking of the US dollar:
On the one hand, the international monetary system has been formed for many years, and the efficiency of this system is the basic guarantee for the trade efficiency of various countries. Once the existing system is broken, how to establish a new system, and how to ensure that the efficiency of the new system can meet the efficiency needs of international trade and financial settlement, there are various uncertain factors. If the new system is not as good as the old system, it will inevitably bring certain losses to various countries, which is what everyone is generally worried about;
On the other hand, if the United States does not stop at the edge of the cliff and continue to act on its own, no matter how you "miss" the existing system, there will be a day when you can't bear it. If that's the case, it's better to break up quickly than to hesitate, which may lead to rebirth sooner.
In such entanglement, it is inevitable that people will gradually de-dollarize, or at least prepare for the end of the old system.
De-dollarization is not a matter of a day, but a long process, which roughly needs to go through the following stages:
1. The proportion of US dollar settlement decreases
Countries can orderly reduce the proportion of US dollar settlement in trade, adopt means such as currency swaps, and strengthen the credit status of trading countries; then adopt multilateral currency swaps to form a regional settlement system, and strengthen the credibility of regional countries.
2. Regional settlement systemAt this stage, it is no longer a multilateral currency swap, as this would reduce trade efficiency and settlement efficiency. Regional settlements can rely on a certain currency and the credit of a specific country to form a regional dominant currency system.
3. Surpassing Sovereign Currency
Another option for the integration of regional settlement systems is the emergence of a supranational currency if a single dominant currency cannot meet actual needs. However, the issuance of this currency must surpass the form of supranational currencies like the Euro and form a more scientific currency issuance mechanism.
What will the future international monetary system be like?
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