Currently, the U.S. dollar is the world’s dominant reserve as well as transactional currency that implies the necessity for any financial transaction between any two foreign parties being approved by the US financial system. But the recent US policies particularly the imposition of primary sanctions against Iran, Russia, Turkey, and threats to enforce secondary sanctions are causing a significant shift prompting countries either to replace the US dollar as a reserve currency, opt for currency swaps or to use alternative currencies for trade related transactions. Not only this but states have also resorted to a greater use of crypto currency. Hence, there has been a worldwide backlash against Trump’s attempt at weapon zing the dollar. These policies are also evident of the fact that the administration is attempting to reinforce the American imperialism.
In response to the Iranian sanctions, Iran has been looking for way outs while its major oil importers such as India and Iraq have either partially switched to the use of national currencies for the purchase of Iranian crude oil or are considering a switch. Similarly, US sanctions against the Russian defence system were met with an unfavourable response whereby Russia’s significant importers have partially switched to the use of their own national currencies for trade related transactions with Russia. Russia itself has now signed currency swap agreements with China, and Iran among others. Similarly, in the beginning of the year 2019, Europe announced the creation of INSTEX (Instrument in Support of Trade Exchanges) for the purpose of trade related transactions with Iran. Further, the European Central Bank in 2017 reported to have replaced €500 million ($611 million) worth of US dollar reserves into yuan securities. Today, Trump’s policies are themselves threatening the pre-eminence of the US dollar.
On the other hand, China has been on a strategic campaign to internationalise yuan or Renminbi so as to replace the USD as the global currency or at least to enable it to come at par with the US dollar. This has far-flung implications for US economic or financial hegemony.
It was in the year 2015 that International Monetary Fund granted Renminbi or yuan the reserve currency status among other currencies by adding it to the special drawing rights basket that also includes the US dollar, British pound, the Japanese Yen. This, ultimately, has paved China’s way to internationalize its currency since in order to acquire the status of a global currency, it first ought to acquire the status of a reserve currency.
Further, China itself launched initiatives to stimulate a greater use of Renminbi such as the Asian Infrastructure Investment Bank and the Belt and Road Initiative since these initiatives created an outlet for a greater use of RMB. The positive relationship between a greater use of RMB and BRI is determined by the fact that on the land belt, the use of RMB has substantially increased for debt financing and transactions in Central Asia and along the maritime road, it has substantially increased in Southeast Asia. One of the objectives behind Chinese Belt and Road initiative has been to enhance the use of the Renminbi since an enhanced trade also increases the demand for RMB. And although the Asian Infrastructure Investment Bank (AIIB) currently lends out only in dollars but it is highly likely that it might replace the dollar with Renminbi in the future.
Moreover, China has also introduced swap facilities for the countries along the Belt and Road initiative, has accumulated gold reserves and launched yuan-priced crude features. The launch of yuan-priced crude features implies China’s will to make yuan a dominant currency when it comes to global oil trading.
However, Renminbi acquiring the status of a dominant currency is not as easy as it may seem but if the US continues with the weaponization of dollar with economic sanctions, it will further accelerate the RMB internationalization. And once the RMB achieves the status of truly being an international currency, China would be empowered to build an alternative global financial structure.
All in all, United States’ domineering policies where it aims to make the rest of the states bow before the American will could ultimately have a backlash, the manifestation of which would be a diminished American global influence. It now needs to clarify the misconception that the US does not possess a limitless capacity to influence the policies of other states.