De-dollarization of world finance: a myth or a real problem for the USA?

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The trend towards de-dollarization and the transition to national currencies is growing in the global economy. This is dictated by instability in the U,S. and Washington’s sanctions policy. Donald Trump promises to preserve the status of the dollar, but at the same time he wants to collapse its rate. The plan to devalue the “American”, reminiscent of Reagan’s 1985 maneuver, is unlikely to be supported by other countries, and economists are skeptical.

Countries are saved by gold

De-dollarization as a process may take many decades, but as a strong mental fear of Americans and U.S. elites, it is relevant right now. No wonder it has become a central issue in the election campaign of Kamala Harris, and especially Donald Trump.

In the U.S., the rejection of the dollar greatly frightens exactly the Republicans, while the Democrats often try to ignore them. Against this background, Team Trump promises voters to preserve the dollar’s status as the world’s reserve currency by any means necessary. Indeed, the share of the dollar and U.S. Treasuries in the reserves of the world’s central banks is shrinking, and many countries are switching to physical gold. Because of this, a gold rush continues in the world. In the first half of 2024, central banks around the world bought a record 483 tons of gold, which is 5% more than the previous record for the first half of 2023.

Gold demand from central banks is at its highest level since 1950. China has been actively buying gold for more than 20 consecutive months, and now India is also coming to the fore as it tries to reduce its dependence on the dollar and U.S. government bonds. New Delhi is also bringing home 100 tons of gold that had been stored in British banks since the 90s. Poland is also in the lead in gold purchases, as it is also worried about its reserves amid domestic economic problems. Today, no one wants to find themselves in a situation of freezing or confiscation of assets. In this regard, the demand for physical gold as an alternative to the same American “treasures” will continue to grow, and the cost of gold will set new records.

*Photo by Jingming Pan* / *Unsplash.com*

Political instability inside the U.S. with the split of the country, the threat of mass unrest after the elections and the prospect of a technical default with devaluation of the dollar are also of particular concern. The next increase in the national debt ceiling is scheduled for early January 2025 at the height of the transit of power. Anything can happen there, and this is realized by more and more countries, which are trying to mitigate the consequences of the impending debt crisis for themselves in advance. Besides, gold cannot be confiscated, central banks of different countries buy 1000 tons of gold a year, and the demand for it is at the maximum for 75 years. Well, the yuan is rapidly increasing its share in world trade.

The “Chinese” is overtaking the “American”

The share of the yuan in global trade in the summer of 2024 set another record. Moreover, the growth in the popularity of the yuan reached 13% in one month, and the pace of transition to trade in national currencies is accelerating, although it has not yet led to the collapse of the dollar. In 2023, the share of renminbi (RMB same as yuan CNY) in Swift transactions increased by 33%, and this year’s growth promises to be even more significant. Back in November 2023, the yuan surpassed the yen, and now comes on the heels of the British pound. This does not yet take into account all trading that bypasses the Swift system. Inside Swift, the share of yuan is close to 5%, but if we take all external transactions, it will be much higher.

The share of the euro, which is simultaneously being pushed up by both the Americans and the Chinese, is also sagging strongly. Therefore, the share of the dollar within Swift has even increased since 2022, it is simply “cannibalizing European financial instruments”. On the trade finance market, the yuan has already surpassed the euro in popularity. At the same time, the rise in the popularity of gold as opposed to the dollar and U.S. Treasury securities on the background of sanctions wars is no less dangerous for the U.S., because it will be much more difficult to service the rapidly growing national debt in the future.

The dollar will also be under attack domestically as it moves to trade in other national currencies, especially the yuan. Trump is threatening to impose tariffs of 100% on trade with countries that refuse the dollar and “cut off” their access to U.S. markets. Moreover, Trump’s economists admit that sanctions were the trigger for de-dollarization but they are unable to act in any other way. However, these plans, coupled with Trump’s proposal to devalue the dollar by 30-40% for the sake of buying the acute debt crisis in the U.S., may have unpredictable consequences.

Now nobody knows how to devalue the dollar properly, and the hard questions are being asked by financiers watching Trump’s promises to sharply depreciate the dollar. He wants to repeat Reagan’s 1985 maneuver, when the U.S. managed to convince Japan and Germany to accept the strengthening of their currencies and the weakening of the dollar. Yet Trump’s economic platform is slowly taking shape. His former Commerce Secretary Robert Lighthizer is already publishing his plans for a sharp but painless depreciation of the national currency. In his opinion, devaluation of the dollar will make it cheaper to export goods from the United States and reduce America’s current exorbitant trade deficit. However, other countries are unlikely to take it positively, and it will also weaken the economy of the European Union, which is weakened by its own sanctions.

Risks of fragmentation of the global economy

And China is now pursuing a policy without looking to the U.S. and ignoring Biden’s desperate calls to stop the “overproduction” of goods that U.S. businesses cannot keep up with. Beijing is gradually weakening the yuan, boosting export growth and increasing yuan convertibility abroad. If countries refuse to accept the devaluation of the dollar, Trump will threaten them with tariffs. He wants to impose a flat 10% tariff on all U.S. imports and raise it to 15% for the European Union and 60% for China, even though this would cause a real inflationary tsunami in the U.S. economy. Wall Street is afraid that the devaluation of the dollar will be welcomed by a large number of countries. This will lead to fragmentation of the global financial system and dramatically accelerate de-dollarization. But for the isolationist Trump, this scenario may be the lesser of evils, because the alternative is the collapse of the U.S. financial system, which is already shaking under the weight of skyrocketing debt and devaluing the dollar would allow it to last longer.

Devaluing the dollar would actually make it cheaper to export goods from the U.S. and would reduce America’s current exorbitant trade deficit. However, to completely get rid of the deficit, the U.S. would have to collapse the dollar by at least 40% against the currencies of its major partners. And it is important that this is not 1985, and it will be impossible to convince China to sharply increase the yuan exchange rate, because it will undermine the economy of the Celestial Empire.

*Photo by Lukasz Radzie*jewski / Unsplash.com

Europeans are dependent on the U.S., but for the EU, a stronger euro would be fatal. In the U.S., it will cause a new spike in inflation, coupled with tariffs that Trump promises to impose on all imports to the U.S. from China and Europe.

Trump intends to subjugate the Fed

Trump’s team will have to pour hundreds of billions of dollars into buying other countries’ currencies to weaken the dollar. It is quite possible that they will force the Fed to do this. Trump wants to nationalize the Fed and is preparing a plan for a massive reform of the U.S. financial system. They want to put the Fed under the direct control of the White House and give Trump the power to influence decisions about the dynamics of the key rate and the emission of the dollar. All not so much for the sake of finance, but to fight the “deep state”. Now not only in the intelligence services and the Pentagon, but also in the financial institutions, have long been fused with Wall Street. If Trump wins, they may be made accountable to the U.S. president, depriving them of their “independence”. Republicans want to use control over the Fed to reshape America in a big way.

However, the rest of the world will definitely perceive with extreme negativity the U.S. plans to stabilize the situation at the expense of others. As will Trump’s intention to impose sanctions against anyone who refuses to trade in dollars. Although it is the thoughtless sanctions policy with turning the dollar into a “financial weapon” that forces more and more countries to trade in their own currencies and actively invest in gold. For the Democrats, this gives them an excuse to accuse Trump of usurping power once again.

Hypothetically, when Democrats come to power in 2028, they will be able to turn on the dollar issue at full speed to finance all their “green projects” and “minority reparations”. And then America will be waiting for the Argentine scenario with a real rampant inflation and, possibly, default. But what is more important now is that with a devalued dollar it will be easier to service the national debt, which will continue to grow every year. True, this will lead to further fragmentation of the global financial system and accelerate the processes of de-dollarization. But for Trump, this may seem like the lesser of evils, because the alternative is a debt crisis in the United States, which may come exactly during his term in the White House.

Such a sad legacy Trump will receive from Biden. However, no less problems will be for Harris, who is full of left-wing populism only before the election, and will dramatically change her policy from January 2025. But we should realize that this does not depend on the personality or party affiliation of the future president. All the current processes can rather accelerate the deconstruction of the dollar financial system one way or another as well as the instability in the U.S., which concerns far from only the financial sphere.