Premature Schadenfreude Directed at the US Dollar

Photo Credit: ATHIT PERAWONGMETHA/REUTERS

© 2023 Farok J. Contractor, Distinguished Professor, Rutgers Business School

RECENTLY, THERE HAS BEEN A PROLIFERATION of wishful-thinking posts predicting the imminent decline of the US dollar as a universal currency, further stating that its fate is to be replaced by the Chinese yuan, the Indian rupee, or some other currency.

Pundits and leaders from several developing countries (such as Lula De Silva of Brazil[1]) have expressed resentment at the dominance of the US dollar as a medium for invoicing or international trade. This especially follows the recent increasing tendency of the US government to impose sanctions on other nations, freeze their dollar assets, and, in a few rare cases, prevent them from accessing the SWIFT (Society for Worldwide Interbank Financial Telecommunications) network, which handles some $150 trillion[2] in transactions annually, including imports/exports, foreign direct investments, personal remittances, and other international payments.

So habituated are companies to the dollar that, for example, a Malaysian exporter of furniture to India is most unlikely to invoice the export in rupees or ringgit, but rather will choose to denominate its invoice in US dollars. The same habit applies to Brazilian exporters/importers and, for that matter, most international companies. Why? In a word, “trust” or “assurance,” not just in terms of the relative exchange rate stability of the dollar (vis-à-vis the gyrations of other currencies), but also in the ease and guaranteed freedom that the currency exchange or remittance will actually go through unimpeded.

Since 1938, Saudi crude oil exports have been invoiced in dollars. More pertinently, virtually all commodity prices are expressed as “dollars per ton” or “dollars per barrel.” This has led to all kinds of conspiracy theories and blog posts suggesting underhanded influence by the US government or the CIA on rulers of commodity-exporting nations. Indeed, such influence may have been exerted in the past. Today, the Saudi crown prince is openly disregardful, if not contemptuous, of the US government.[3] But the dollar, as the world’s principal means of exchange, continues to be strong.

Muammar Gaddafi, Saddam Hussein, and even current Iraqi leaders wish oil to be denominated in, say, the euro, the Chinese yuan, or a basket of currencies – but not in the dollar. In most cases, it is autocrats or oligarchs who voice such opinions. And, of course, the Chinese, being rightly proud of their nation’s emergence as the world’s biggest economy (in Purchasing Power Parity[4] calculations) feel slighted that their currency, the yuan or RMB (renminbi), has only a minuscule role in international transactions.

Social media today are full of accounts predicting or anticipating a quick decline of the dollar. Such posts reflect schadenfreude, a pithy German word meaning pleasure derived from learning about other people’s misfortunes. These musings may be posted by Russian or Chinese activists, or on the part of Indian bloggers, fanning the flames of India’s new-found assertiveness and swagger, for domestic political consumption.

I feel it is true that the overuse of American sanctions (which have increased recently in response to growing nationalism and aggression by other countries) may prove, in the long run, to be self-defeating. The more other nations or persons feel threatened by US sanctions, the louder the voices to find another currency as a medium of exchange. Already there have been nascent attempts. The Chinese have loaned or made swap arrangements whereby yuan are allocated to a few foreign governments for their international traders to invoice in and use.[5]

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But for all the schadenfreude and angst, there is little near-term prospect for the decline of the dollar. A recent article in the April 7, 2023, Wall Street Journal[6] provides a cogent summary of reasons, as well as cites facts that readers can verify for themselves:

1) Well above 80 percent of all foreign transactions have the US dollar on one side of the exchange.

2) 60 percent of all government reserves are still held in US dollars.

3) Half of all exports in the world are invoiced in US dollars.

4) A universal currency needs four attributes. For the foreseeable future, no rival currency is likely to exhibit

• trustworthiness or confidence in the currency by most participants in global commerce,
• free convertibility (unhindered by government controls),
• exchange rate stability (needed to function as a universal currency or medium of exchange), and
• status as a preferred repository of stored value.

While the Wall Street Journal is a moderately right-wing newspaper, it is a respected and mostly factually accurate publication. This does not mean that I automatically subscribe to all its views. In this instance, however, I do.

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[1] Brazil’s Lula calls for end to dollar trade dominance. Financial Times. April 13, 2023.

[2] SWIFT Plots Real-Time Role for Next 50 Years of Cross-Border Payments. By PYMNTS. October 3, 2022.

[3] Why Saudi Arabia defied the US over OPEC oil supply cut. By Nadeen Ebrahim and Abbas Al Lawati. CNN. Published 11:40 AM EDT, Fri October 7, 2022.

[4] Purchasing Power Parity. © 2022 by Werner Antweiler, University of British Columbia.

[5] China Is Quietly Trying to Dethrone the Dollar: Regional groups and small banks are helping insulate Beijing against sanctions. By Zongyuan Zoe Liu. Foreign Policy. Published September 21, 2022, 3:59 PM.

[6] Online version (requires subscription).