The trajectory of geo-political trends with regards to tariff wars, renegotiation of multilateral trade deals unilaterally by the US, EU-US geostrategic equation with US demands of EU to fund more of the Security, moving of manufacturing back to the US and its focus on reducing trade deficits are impacting the US Dollar.
In the short term, the Dollar is likely to have a surge and that is being seen now. However, Putin’s latest remarks in the Energy Conclave in Russia give a strong indication that there is a counter reaction that is forming through convergence of diverse interests amongst other players.
The EU economies, notably Germany and France, despite their misgivings about Russia are being forced to reconsider their positions and their dependence on the interlinked economic system with the US and its Dollar.
China is facing a tariff war with the US, and as the largest owner of the US Dollar reserves and US debt (US Treasury bonds), it is in an unfamiliar territory. With slowing down of its economy and raising internal debt, it cannot afford to lose access to the US market, but a stronger dollar can also be beneficial in the short term given the reserves and debts it has. It is also facing a huge energy problem with increasing oil prices and strengthening dollar.
Which leads us to the next international pole in terms of energy, OPEC and Oil producing countries. Sustained pressure on them by the US to increase production and bring down prices on one hand while it is cutting down the overall availability with sanctions on Iran and impending sanctions on Russian Oil. This is being further compounded by increasing internal economic pressures and economic crisis in almost all Gulf states including Saudi Arabia which is recording massive budget deficits.
India is headed for an election year and one cannot ignore the impact of price surge due to fuel price rise. Huge programmes are being funded with tax revenues from Oil and this leaves very little room to keep petrol prices down. India too is facing a problem of an orchestrated attack on its capital markets as well as on the Rupee. It is in fact under an economic attack while it is undergoing a transformation and clean up of the financial systems internally at the same time. That is a huge challenge. On the positive side, economic growth is good; monsoon is good, but the increasing dollar and increasing fuel prices can undo or at the minimum cramp Indian economic management flexibility.
Over the last 4 years, thankfully the government has been working consistently on 4 fronts
- Building up of energy security through – building strategic reserves, forward negotiating contracts, diversifying sourcing, non dollar denominated contracts, increasing alternatives to Petroleum, Oil and Lubricants (POL) internally, consumption management through redirected subsidies & keeping prices high to moderate demand
- Long term alternative building – Push on renewables, International Solar Alliance, creating non-fossil fuel based alternative grids, etc
- Securing growth through investments to create national demand instead of depending on exports thereby insulating from both currency pressures as well as trade related pressures
- Working on creating alternative energy (ISA) and financial systems (BRICS) that can withstand American pressures using the Dollar or the financial system that is controlled by them on the basis that the Dollar is the de facto universal reserve currency. This is being done under the auspices of BRICS and a plethora of bilateral arrangements and regional arrangements where the trade and investments will not be in dollar
The convergence of interests in protecting themselves against American unilateral exceptionalism across these otherwise diverse groups is forcing a turn of events that may see the first steps in the coming together of an international coalition of powers, motivated purely by their own national interests, to formulate together a strategy to move the global financial order away from the omnipotent dollar basis to a new basis of perhaps a basket of other currencies that will include Chinese Yuan, Russian Rouble and Indian Rupee besides the Euro.
The American isolationism and unilateral withdrawal being carried out by Trump Administration is likely to have an enormous impact on American economy too. In the short time, it looks like the benefits of a strong dollar and a high performing stock market coupled with increased manufacturing is going to work for America. It may even ensure that a Trump second term is achieved.
At the same time, it is also likely to have an impact on the global arrangements that has held the US led western dominance in place post WWII. The renaissance of China and India and the revival of Russia as an energy power will accelerate the shift from Europe and American dominance to Asia. Technology trends and new energy ideas will reduce the prominence and wealth of the Middle East.
In the medium term if the US persists with its inward looking policies and unilateralism in using the status of the Dollar to exert its geo-strategic muscle, then the others will respond in a manner that removes the vital cog that is the Dollar’s status as the world’s most acceptable reserve currency and replace it with several currencies.
When that happens, the US Debt will come home to roost as the World’s appetite to underwrite US spending will start to ease off. The current trajectory of events seems to suggest this. Hence Putin’s warning in the recently held Energy conclave where he alluded to the US actions being akin to cutting the branch one is sitting on, is a crucial signal of how things are likely to take shape.
There is a lot of ground to be covered before such a thing like the replacement of the Dollar as the universal reserve currency can happen. But it is now more likely to happen than not. It is more a question of when and how that shift and change in the global financial system will happen, and not whether it will.
Rajaram Muthukrishnan is a chartered insurer by qualification with decades of international experience in leadership roles in MNCs. He is actively involved in encouraging social activities that promote an Indic worldview