Iran, China Seek to Loosen Dollar’s Grip on Global Markets

Iran, China among those trying to end dominance of the U.S. currency

A small but growing number of countries are stepping up efforts to wean themselves off the dollar, aiming to chip away at the U.S. currency’s decadeslong dominance.

Iran last week became the latest when it pledged to replace the dollar with the euro in its foreign currency accounting.

China introduced the world’s first yuan-denominated oil contracts last month, part of a continuing effort to raise its currency’s global profile, while Venezuela launched a bitcoin-like cryptocurrency earlier this year. Russia has ramped up its gold reserves to diversify away from the dollar. Still, none of these new efforts has threatened the dollar’s global role.

Some analysts say the governments moving against the dollar may be trying to capitalize on growing unease among many nations, including U.S. allies, over recent or perceived shifts in U.S. trade policy, Washington’s approach to global alliances, and conflicting signals from the Trump administration about its preference for a strong dollar.

Share of countries anchoring their currencies to the dollar:

Increased uncertainty on those fronts could eventually fuel additional efforts to create an alternative to the dollar. For now, however, the attempts are unlikely to succeed, analysts and economists say, just as previous efforts had little or no success.

“The U.S. has been using financial sanctions very aggressively so, of course, countries like Russia and Iran will do what they can to move away from the dollar,” said Kenneth Rogoff, a professor at Harvard University and the former chief economist of the International Monetary Fund.

For other nations, boosting use of their currency would require substantial changes in policy. China’s yuan, for example, is unlikely to increase its tiny share in global transactions until Beijing removes longstanding curbs on foreign investment, an effort that could take many years, analysts said.

The dollar’s dominance looks secure. Nearly 60% of all countries, accounting for 76% of the world’s gross domestic product, had exchange rate regimes that were in some way anchored to the dollar in 2015, Mr. Rogoff’s research found.

The U.S. currency is involved in nearly nine out of every 10 transactions in the daily $5.1 trillion foreign-exchange market, data from the Bank for International Settlements showed. The dollar makes up nearly two-thirds of the $11.42 trillion in foreign exchange reserves held by central banks.

Over recent decades, there has been “a stunning rise in the dominance of the dollar,” Mr. Rogoff said.

Shares of central bank currency reserves:

In fact, most nations would agree that there is a global benefit to doing business in one main currency, since it is easier and cheaper for companies to conduct international business and for investors to buy and sell commodities.

The euro gained traction internationally after its introduction in 1999, with a rise in cross-border lending denominated in the currency. But when the eurozone’s sovereign debt crisis raised the specter of countries defaulting on their debt, the chances of it supplanting the dollar were dashed.

In 2009, the euro peaked at 28% of global FX reserves. In most recent data, the single currency made up around 20%, though some analysts expect that to move higher as the European Central Bank winds down stimulus and reverts to more traditional monetary policy.

The dollar’s 6% decline over the past year reflects in part confusion over the Trump administration’s policies on trade and other issues, said Barry Eichengreen, professor of economics at the University of California, Berkeley.

Administration officials have also at times offered conflicting signals on whether the U.S. favors a strong dollar, breaking a decades-old precedent of officials saying that a strong currency is in the country’s best interest.

In January, U.S. Treasury Secretary Steven Mnuchin said a weaker dollar in the short term would be good for U.S. trade. Several days later, he said his comments had been taken out of context and reiterated that, in the long run, a stronger dollar “is a sign of the economic success of the U.S.”

Iran’s recent efforts aren’t its first attempt to back away from the U.S. currency. And former Venezuelan and Iranian presidents Hugo Chávez and Mahmoud Ahmadinejad once cheered earlier declines in the value of the dollar, suggesting oil would be priced better in euros.

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Yet oil markets are still overwhelmingly priced in U.S. dollars, as are nearly all other raw materials. The Iranian rial has dropped by more than three-quarters against the dollar since then, declining 14% since the beginning of this year alone, leaving citizens lining up to exchange rials for foreign currency in the capital city this month. The Venezuelan bolivar has lost almost all of its value over the same period.

China’s efforts to use the yuan to create an oil benchmark that will rival those in New York and London “look to be a non-starter,” the Council on Foreign Relations said in a report. In February, the yuan made up just 1.6% of domestic and international payments, according to financial transactions firm SWIFT. As a share of currency reserves, the yuan represents 1.2%.

Those attempts would likely be more successful if officials removed capital controls, as currencies that foreigners can save and invest efficiently are always preferred for international transactions.

“China’s bond market is just way too small to support a truly global renminbi,” said Benn Steil, CFR’s director of international economics.


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Sharp Drops in Currencies Hint at Spreading Volatility

Declines in the Russian ruble, Turkish lira and other currencies signal that recent turmoil in stocks may be hitting other assets

The currencies of places as diverse as Russia, Hong Kong and Kazakhstan slid last week, an alarming sign to some investors who worry that the geopolitical volatility affecting U.S. stocks is spreading to other markets.

Hong Kong’s dollar hit the lowest level allowed under a more than three-decade-old U.S. dollar-peg agreement, forcing the de facto central bank to step in to defend the currency and stabilize it. Russia’s ruble fell amid increased U.S. sanctions against the country and concern about a U.S. strike on Syria, a decline that also contributed to a fall in Kazakhstan’s tenge. Those moves came alongside a relatively calm week elsewhere, in which the Dow Jones Industrial Average rose nearly 2% and the U.S. dollar was little changed against a basket of currencies.

Currency markets have been steady this year, and some worry that investors aren’t prepared for major global shifts, including tightening monetary policy in the world’s biggest economies, that could threaten a yearslong emerging-markets rally.

This week, investors will also confront news that the U.S., U.K. and France launched missile strikes on Syria in retaliation for a suspected chemical-weapons attack. While officials indicated there aren’t currently plans for more strikes, the attack is likely to add to tensions between the U.S. and Russia—which supports the Syrian regime—and could inject more volatility into emerging-market assets and prices for oil and other commodities that many of those nations export.

When geopolitical uncertainty rises, foreign-exchange investors tend to pull back on emerging-market currencies and flock to those considered safe, such as the Japanese yen.

Some investors and analysts worry that foreign exchange could become the next arena in a burgeoning trade conflict between the U.S. and China. China’s yuan has thus far been resilient to the trade spat, but analysts fear a further ratcheting in tensions could drag down both the Chinese currency and a broad range of other Asian currencies.

A JPMorgan Chase & Co. index that tracks expected volatility in emerging-market currencies rose last week to its highest level since February’s market rout. Another JPMorgan metric for major currencies—such as the dollar and euro—continued to fall, suggesting that volatility remains confined to the more sensitive currencies of developing and emerging-market nations.

Investors say one major threat to currency-market stability is the growing trade skirmish between the U.S. and China. Although tensions have eased since earlier this month, when the world’s two largest economies threatened to impose tariffs on billions of dollars of each others’ goods, few expect the calm to last.

Some investors fear that China could retaliate against U.S. protectionist policies by devaluing its currency, which has risen about 10% against the dollar over the past year.

“If China were perceived to be signaling it wanted a weaker yuan…that’s a pretty effective way of offsetting any trade gain the U.S. might try to achieve through tariffs,” said Brad Setser, a senior fellow at the Council on Foreign Relations.

Currencies vulnerable to a yuan devaluation include the South Korean won, Singapore dollar and Thai baht, as well as those of other export-dependent Asian nations, analysts said.

Eswar Prasad, a professor in trade policy at Cornell University, said any effort to devalue the yuan could quickly backfire on China. Its devaluation of the yuan in 2015 sparked a global market selloff and set off a wave of capital outflows that China spent around $1 trillion in reserves trying to halt.

Devaluation “would be a tool that could actually hurt the Chinese a lot more than it would hurt the U.S.,” said Mr. Prasad. “It would really set the Chinese back in terms of what they’re trying to accomplish with financial-market opening.”

The rise in global policy and trade tensions has roiled other emerging-market currencies. The Russian ruble tumbled 6.8% against the dollar last week after the Trump administration announced new sanctions against government officials and business magnates in Russia. Kazakhstan’s tenge dropped 2.3% against the dollar, highlighting fears that the ruble’s decline will upend trade between the neighboring countries.

Meanwhile, the Turkish lira fell 1.3% last week as the emerging-market volatility sharpened investor concerns over the health of that nation’s economy.

The declines mark a reversal from a months long rally that took emerging currencies and stocks to multiyear highs, as investors brushed off uncertainties surrounding global trade and politics to focus on strong economic growth in those nations. An MSCI index of emerging-market currencies has gained around 2% this year, while its benchmark emerging-market stock index has risen 1%. That compares with the S&P 500’s 0.7% decline and the Stoxx Europe’s 2.6% fall.

A jump in volatility could also pressure countries whose currencies remain tied to the dollar, such as Saudi Arabia and Qatar. Pegged currencies are often allowed to trade only at a specific rate or within a tight band, and volatility can make upholding those levels more difficult as other factors—such as investor flows in and out of the country—buffet the currency.

Many developing nations linked their currencies to the dollar decades ago in a bid to insulate their economies from volatility. But the dollar’s surge from 2011 to 2016 and a multiyear commodity-price rout forced many countries to cut those ties as they became too expensive to maintain.

In 2014, Russia’s central bank began taking steps to allow the ruble to float freely as the country’s economy came under stress. Countries including Nigeria, Egypt and Kazakhstan have abandoned or loosened their ties to the dollar recently.

“Pegs don’t fare very well in a market that’s volatile,” said Mark McCormick, North American head of foreign exchange strategy at TD Securities. As markets become less stable, “the pegs will be challenged,” he said.


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