The supremacy of the US dollar in the international financial system has long been undisputed. But countries like Brazil are trying to break away.
  • Opinion by Monica Hirst, Juan Gabriel Tokatlian (Rio de Janeiro, Brazil / Buenos Aires, Argentina)
  • Interpress service

The dominance of the dollar and the hegemonic position of the United States have long been intertwined. And recent global transformations affect Americans’ ability to maintain this: the gradual shift of the center of gravity from West to East, the crippling complexity of US domestic politics, the growing muscle mass of the international projection of China, and an international assertiveness among the countries of the Global South has held back the supremacy and status of the US dollar.

And yet the currency still has by far the largest share of global trade, foreign exchange transactions, SWIFT payments and debt issued outside the United States. In fact, Western financial agents, government officials and reputable experts tend to downplay the so-called de-dollarization, arguing that a relatively weakened dollar does not necessarily mean its demise.

Despite controversial positions, it is undeniable that the world system is facing more complex, diverse and multifaceted challenges involving currency competition and new inventive financial avenues.

Resistance to the US dollar

The so-called de-dollarization in global finance has its landmarks. The launch of the euro in 1999 was crucial because the European currency now represents 20 percent of global foreign exchange reserves. In the early 2000s, an Asian currency unit also came to life: it represented a salad bowl of 13 currencies from East Asian countries (ASEAN 10 plus Japan, China and South Korea).

Along with the successful spreads of economic regionalization, Western-led geopolitics also came to be a source of global financial news that affected the supremacy of the US dollar.

The growing use of a sanctions regime against countries such as Iran, especially since 2006, and Russia following the annexation of Crimea in 2014, encouraged alternative currency arrangements. As of today, Washington’s sanctions policy punishes 22 nations.

The invasion of Ukraine by Russia in 2022 and the extension of sanctions preventing the use of the US dollar encouraged even more de-dollarized practices. In response to the decision to disconnect Russia from SWIFT, Moscow advanced bilateral fuel transactions with partial payment in rubles.

At the same time, Russia and a group of African countries began talks to establish settlements in national currencies, suspending both the US dollar and the euro. At the same time, China is trying to isolate itself from the West and is trying to internationalize the renminbi, even though it represents less than 3 percent of official reserves in the world.

Moscow and Beijing are moving closer to economic cooperation, France and Saudi Arabia agreed to use the renminbi in some oil and gas deals, while Bangladesh became the 19th country to trade with India in rupees.

Last but not least, a gold rush is also taking off. As Ruchir Sharma has recently observed that the key buyers are now central banks, which are acquiring ‘more tonnes of gold now than at any time since records began in 1950 and currently account for a record 33 per cent of monthly global demand for gold and 9 of the top 10 are in the developing world.’

In addition, some African countries appear willing to trade in currencies backed by rare earths. Indeed, in the Global South there is a growing perception that de-dollarization is a step towards a multipolar world where new actors, interests and rules interact. In that sense, it is becoming apparent that a multi-currency trading system is slowly emerging.

How Brazil is ‘de-dollarizing’

De-dollarization has been included in Brazil’s foreign policy strategy. Since the inauguration of his third term, President Lula da Silva quickly revealed the intention to overcome his discrepancies with Western regulation. A postponed narrative contesting the predominance of the Global North in the world order has resurfaced.

Demands for inclusive reforms in global governance, the condemnation of geopolitical worldviews leading to securitized practices and military escalation, and the questioning of the dominance of the dollar in international trade and finance have emerged. In the current context of tensions and rivalries between the great powers, Brazil aspires to speak of an autonomous voice for the Global South.

And thus Lula has tried to promote peace in Ukraine on the basis of negotiations that recognize the voices of all parties involved in the war.

Lula’s de-dollarization stance has been boosted by Brazil’s association with the BRICS, as well as its expanded bilateralism with China. The continuously record Brazil-China trade relationship peaked at US$150.5 billion in 2022 (while the Russia-China trade relationship for the same year was US$190.2 billion).

As bilateral ties expand further, during Lula’s recent state visit to China, new deals are being negotiated, aimed at putting trade and financial transactions on track directly with Chinese Renminbi and Brazilian Reais.

At the same time, the Brazilian government has decided to use the New Development Bank (NDB), the BRICS multilateral bank, as a platform to defend a de-dollarized trading system among its members and with the countries that benefit from NDB credit lines.

By positioning former Brazilian President Dilma Rousseff as head of the bank, Lula has upgraded Brazilian political commitment to this front line. This will surely be a recurring pledge in Brazil’s performance in global governance arenas, with mention of its 2024 presidency of the G20.

It is notable how the Lula government has pursued a cautious strategy that balances its signals against dollar hegemony among its BRICS partners with a constructive presence in a dollar-dominant terrain such as the Interamerican Development Bank (IDB).

Holding the presidency of the IDB since last December, and supporting the candidacy of Brazilian ex-IMF official Illan Goldfajn, Brazil has extended its footprint in international finance from Washington to Shanghai.

Beyond Brazil

Brazil has made a first attempt to bring in the de-dollarization card to its South American neighborhood, notably alongside Argentina. In February last year, bilateral talks gained momentum to begin work on a joint currency project that could reduce dependence on the US dollar. This could mean an intrusive de-dollarization within the MERCOSUR area.

Following Brazil’s example, Argentina has begun to consider the use of the renminbi in its trade with Beijing. For Brazil, this is a move that could step by step lead to a regional financial terrain with relative distance from US dollar dominance. However, ongoing macroeconomic turmoil in Argentina, along with an extremely low level of foreign exchange reserves, will certainly hinder these plans in the short term.

Also, it will take more than two to tango. If a sustained economic recovery of Argentina takes place, Brazil will need to secure the support of extra-regional, heavy, non-Western actors, especially China and India, in investment and trade flows to trigger a re-entry of MERCOSUR into the world economy.

De-dollarization can become part of, among other things, a dynamic reconfiguration of financial and productive intersections between Brazil and its neighbors with other regions and economic powerhouses of the global economy. Needless to say, this is a long-term strategy. The most important factor is the role of South America, which in the near future may play a role in the promotion of multi-currency trade.

For now, while a battle flags for Lula’s presidential diplomacy, Brazil’s ties to the US dollar may be diminishing but remain of undeniable relevance. Decision-making in Brazil is carried out by a complex inter-ministerial web responsible for the international sector of the states that cannot avoid the influence of key production segments of the private sector.

The transformation of the Brazilian international financial approach will therefore depend on major adjustments that cannot overlook a broad domestic negotiation process, especially if combined with the strengthening of democracy.

Monica Hirst is a researcher at the National Institute for Science and Technology Studies in Brazil; Juan Gabriel Tokatlian is Provost at Torcuato Di Tella University, Buenos Aires, Argentina.

Source: International Politics and Society (IPS), published by the Global and European Policy Unit of the Friedrich-Ebert-Stiftung, Hiroshimastrasse 28, D-10785 Berlin.

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