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The Relentless, Systematic Tear-Down Of The Dollar Hegemony

February 28, 2014
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Source: Wolf Richter, Testosterone Pit

China’s rapidly aging 1.3 billion folks are all trying to make it in the modern world, and they’ll see to it that their country will have major economic and political heft in the future. So in practically no time, China has become the second largest economy in the world. OK, its credit bubble of strenuously obfuscated magnitude will require a miracle, or else the noise of hot air hissing out of it will be deafening.

One of the long-term goals of consecutive Chinese governments has been to make China number one in just about everything. Including its currency. Displacing the dollar as the world’s reserve currency would be nice, and that’s certainly on the list, but first the yuan must become the most used payment currency. How long would that take, barring the accidental annihilation of the dollar as the Fed yanks on yet another experimental lever with unknown consequences?

Not that other currencies haven’t already tried to trounce the dollar, most notably – don't laugh – the euro. At the time of its invention, the thinking went that it would be the common currency of the entire European Union, a concept anchored in the treaties that each member state signed. There are 28 of them, now that Croatia has joined the ever expanding group. The next candidates have been cooling their heels for years, namely Iceland, Macedonia, Montenegro, Serbia, and Turkey. OK, Turkey, whose membership has been hung up in discord since 2004, has hit some big speed bumps recently. But hey. A slick regime change, and off we go.

But to the greatest chagrin of the Eurocrats, and quite inexplicably, only 18 of the 28 member states have adopted the sacrosanct currency, and a third of them quickly became casualties of the euro debt crisis and had to be bailed out to keep the Eurozone together.

During the early years of the euro, when euro-exuberance was still drowning out clear thinking in the business community, there was a whiff of certainty that the euro would become the world reserve currency and the number-one payment currency. Oil would soon be priced in euros. The petrodollar hegemony would be dismantled. It would make the eurozone burst with economic advantages and breathtaking growth. The dream turned into a nightmare in 2008. Meanwhile, the ECB’s promise to do “whatever it takes” in an “unlimited” manner has become the duct tape and bailing wire that keeps the Eurozone together. It's going to be a while before the euro trounces the dollar as payment currency.

So we stop grinning from ear to ear about the demise of the euro and take a closer look at the numbers provided by SWIFT, the NSA-infiltrated, member-owned cooperative that connects over 10,000 banks, securities institutions, corporate customers, and intelligence agencies in 212 countries and territories. If you’ve ever made an international wire transfer, you’ve dealt indirectly with SWIFT, which forwarded copies of your information to the NSA.

And SWIFT tells us that the euro’s share of world payments in January was 33.5%, just below the dollar, undisputed number one, with a share of 38.7%. Alas, undisputed only occasionally. In other months, the euro was number one, for example in January 2013, when 40.1% of world payments were in euros. The dollar was ignominiously in the second place with a share of 33.5%; or in January 2012, when the euro had a share of 44.0%, and the dollar a lowly 29.7%!

The loathed euro has beaten the green ink off the dollar in certain months! And given the Eurozone’s version of Manifest Destiny, the euro, despite all its problems, will continue to grow as payment currency – and by the time the Chinese yuan gets closer, it will have to aim for the euro, not the dollar.

And the yuan is getting closer. The Chinese government is systematically but gingerly boosting its convertibility and global use. In January, yuan payments increased by 30.6% – to “the highest payment value recorded,” said Michael Moon, a Director at SWIFT – versus 4.8% growth for all payments currencies. It edged out the Swiss franc for 7th place, behind the US dollar, euro, sterling, yen, Canadian dollar, and Australian dollar. In December, the yuan had been in 8th place, up from 12th place in October. Over the last three years, the yuan has passed 22 currencies.

But it isn’t there yet, as far as “global” is concerned: 73% of the yuan payment activity took place in Hong Kong. Most of the remainder was carved up between the UK, Singapore, Taiwan, the US, France, Australia, Luxembourg, and Germany. What share of the payments did it grab in January, compared to the euro’s 33.5% and the dollar’s 38.7%? It hit the phenomenal record of ... 1.4%.

So, a little ways to go.

But the yuan was already the second largest currency in traditional trade finance – Letters of Credit and Collections – that Chinese importers and exporters relied on, SWIFT reportedin December. It had more than quadrupled its share between January 2012 and October 2013. This currency is hot! And it’s furiously breathing down the neck of the dollar. Its share of trade finance? 8.7%. Versus the dollar’s 81.1%.

“A top currency for trade finance globally and even more so in Asia,” is how Franck de Praetere, SWIFT’s Head of Payments and Trade Markets for Asia Pacific, described the yuan. OK, still a little ways to go.

But the writing is somewhere on the Chinese wall. The euro and now the yuan have been taking share away from the dollar. The euro’s campaign, which has already come very far, will be slow and halting, mostly triggered by countries acceding to the Eurozone. The yuan is the new kid on the block. It moves in leaps and bounds. The dollar’s iron grip on the number-one spot for payments has already loosened. And sometime in the future, its grip on the number-two spot will also loosen. Eventually, the same will happen – is bound to happen – to the dollar as the world’s sole reserve currency. And then the economic equations that the US has leaned on for decades to fund its gargantuan public debt and trade deficit will turn to mush.

The US has abused its phenomenal privileges – including the control of the only world currency – to put global financial stability at risk, “like a truck full of dynamite heading right toward us,” said the chairman of the International Advisory Board of the Universal Credit Rating Group. But a “new financial order” is forming. And there's a timeframe. Read....Next Step In Dismantling The Dollar And US Credit Hegemony


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