February 9, 2024: Global News Roundup
Dollar update—“Foreign economic activity is very actively switching to the use of other currencies”
The Global News Roundup collects news stories from entirely international (non-US) media sources on variety of pressing global issues and events.
Good Morning! One of the most interesting dynamics I’ve noticed while tracking the de-dollarization process over the past couple of years is how infrequently this issue is discussed in the mainstream American presses. When the decline of the US dollar has been discussed, the commentary is often dismissive, with pundits typically arguing that the dollar is too widely used and too central to global financial markets to be displaced.
Widespread (American) denial was the backdrop against which six student co-authors and I argued that de-dollarization is not only possible, but has been ongoing since the Great Recession and has actually sped up noticeably since the Ukraine war began (see: “Will the World Ditch the Dollar?”, Oct. 2023). The media’s relative silence on the issue has been trumped only by the almost complete silence of American leadership and regulatory officials in the Treasury, the Fed, Congress, and the White House.
Of course, there’s good reason to keep rather quiet about it all. Like livestock, financial market investors are easily spooked and prone to “herding behaviors”, i.e., mass movements into and out of marketplaces in which the “herd” follows along in an irrational, reflexive manner. If leaders and regulators speak too often or too loudly about the ailing dollar, the commentary risks catalyzing the very currency crisis they hope to forestall or prevent. For this reason, my hunch is that the de-dollarization issue will make its way into mainstream, front-page discussions in the American presses only after the currency crisis becomes so obvious to the public that it can no longer be plausibly denied.
International media coverage over the last few weeks suggests that we may have very nearly reached this point. To start, a little over a week ago, the United Arab Emirates (UAE) conducted it’s first cross-border transfer of “digital dirhams” (the UAE’s new central bank digital currency, or CBDC) using a “multi-CBDC platform called ‘mBridge’” to settle a debt to China. First launched in 2021, the platform is a collaboration between Hong Kong, Thailand, China, and the UAE. (Read more about the mBridge project from the Bank of International Settlements, here).
Writing for Cryptopolitan, Florence Muchai noted that the digital transaction in local currency “eliminated the need for the dollar”, and, further, pointed to the concerns the platform raised among US policymakers: “One member of the United States Congress also noted mBridge’s advancements – Representative Maxine Waters, a member of the House Financial Services Committee, expressed concern that the initiative could be used as a cover for evading economic sanctions.” (Recall that the international de-dollarization movement is partly a backlash to the sprawling use of sanctions by the US and EU, including against Russia in the Ukraine war; see here.)
(Image: “His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, with Chinese President Xi Jinping”, stock photo from Gulf News, 07/20/2019, here. China is one of the UAE’s largest trading partners.)
China, which is pursuing de-dollarization with a variety of tools and strategies, has also enjoyed recent success with “panda bond” issuance. Panda bonds are renminbi-denominated bonds issued by foreign entities and traded on Chinese exchanges, part of a recent push by the Chinese government to increase international usage of and investment in the renminbi (or yuan, the Chinese currency). Among other factors, China’s low interest rates relative to the US and Europe have made the instruments increasingly attractive. According to the International Financing Review, “Egypt in October sold a Rmb3.5bn 3.51% three-year sustainable issue, the largest ever sovereign Panda bond. This was guaranteed by two Triple A rated multilateral development banks, the African Development Bank and Asian Infrastructure Investment Bank, helping to secure competitive terms for the transaction and setting a template for other African countries to follow.”
On January 31, the New Development Bank—NDB, formerly called the BRICS Bank, a multilateral development lending institution designed to compete with the World Bank and International Monetary Fund—"issued a RMB 6 billion 5-year Panda bond priced at 2.66% in the China Interbank Bond Market. This transaction has become not only the largest ever 5-year Panda bond issuance, but it also marked the first issuance of a Panda bond this year in the China Interbank Bond Market by a multilateral development bank”.
Moving on, last Wednesday, just days before the US military launched missile strikes on targets in Iraq, “The Finance Committee in the Iraqi parliament made a statement…calling for the sale of oil in currencies other than the US dollar, aiming to counter US sanctions on the Iraqi banking system.” The article from Gulf Insider continued:
The US Treasury still uses the pretext of money laundering to impose sanctions on Iraqi banks. This requires a national stance to put an end to these arbitrary decisions,” the statement said. “Imposing sanctions on Iraqi banks undermines and obstructs Central Bank efforts to stabilize the dollar exchange rate and reduce the selling gap between official and parallel rates,” it added.
The Finance Committee affirmed its “rejection of these practices, due to their repercussions on the livelihoods of citizens,” and reiterated its “call on the government and the Central Bank of Iraq to take quick measures against the dominance of the dollar, by diversifying cash reserves from foreign currencies.”
Washington imposed sanctions on Iraqi Al-Huda Bank this week, under claims of laundering money for Iran. Several other banks have been hit with similar sanctions over the past year.
A few days later, the Iraqi government banned 8 local banks from conducting dollar transactions. The Iraqi government claimed the bans were a response to US concerns, an effort to curtail money laundering and dollar smuggling from Iraq to Iran. US officials confirmed this rationale and stated their support for the move. That said, there is some reason to believe that the ban is, perhaps inadvertently and perhaps not, facilitating Iraqi de-dollarization. For example, a May 2023 article from Deutche Welle discussed a similar, prior ban on use of dollars for personal and business transactions as follows:
In Iraq, US authorities had been making it harder to get dollars into the country — they were apparently worried that too much American cash was being smuggled to the neighboring Iranian government, which is under sanctions, but is tacitly supported by many Iraqi politicians. This shortage of dollars has led to volatility in the value of the Iraqi dinar, which is pegged to the US currency. This volatility brought about last weekend's ban. In February, also thanks partially to the US currency crunch, Iraq said it would do business with China using the yuan instead of dollars.
More interesting yet—especially given that the dollar’s dominance owes in large part to the fact that a large portion of global oil trading was historically priced and conducted in USD—the Iraqi government yesterday invited Russian state oil giant Gazprom to develop the Nasiriyah oil field in southern Iraq. According to Iraqi News, “The Iraqi Prime Minister elaborated that Russian technologies in the gas, oil, and electricity areas will provide prosperity for Iraq, adding that the naturally resource-rich region needs economic cooperation as well as a multi-regional structure that creates a bright future.”
The news came right on the heels of Iraqi meetings with US and Russian officials about how Iraq can pay Russia for oil-related services and investments without violating US sanctions: “Iraq's foreign minister is due to fly to the United States on Wednesday [two days ago] to discuss recent tight regulations imposed by the New York Federal Reserve on international dollar transactions by commercial Iraqi banks and their impact on Iraq's economy.” (It’s hard to overstate how badly mistaken the US and EU were with their prolific use of sanctions against Russia, a major global exporter of critical materials such as oil, gas, fertilizer, lead, and wheat.)
For its part, Russia, which in January became Europe’s largest economy, announced this week that the Eurasian Economic Union has almost completely de-dollarized trade among members. Tasmin News Agency reported on Saturday that, “The share of the national currencies in mutual settlements among the countries of the Russia-led trade bloc has reached 90% and is still growing,” according to Russia’s prime minister.
The EAEU was established in 2015 and is comprised of Russia, Kazakhstan, Belarus, Armenia, and Kyrgyzstan, with Vietnam admitted as a “free trade partner” in 2016. Mena FN reported this week that “In the first 11 months of 2023, the GDP of the EAEU expanded by approximately 3.5 percent, while industrial production saw an impressive gain of almost 4 percent, and retail turnover surged by more than 6 percent… The progress in de-dollarization within the EAEU not only reflects a commitment to economic sovereignty but also signals a move towards greater financial independence and stability among member nations.”
Russian officials also reported this week that the system it developed as an alternative to SWIFT, the organization that manages dollar-based international payments, now has 159 foreign participants from 20 countries. The Chinese state-run outlet Global Times noted:
Russia is discussing with other BRICS countries the integration of national financial message transmission systems… The share of the BRICS countries in Russia's trade balance has doubled in two years to 40%, and settlements with those countries in national currencies have more than tripled to 85%... Meanwhile, the share of the Chinese yuan in Russia's exports over the past two years has increased by 86 times to 34.5%, and by more than 8 times in imports to 36.4%... Currently foreign economic activity is very actively switching to the use of other currencies…
In related news, the US Fed continued with its “hawkish” interest rate approach and cuts are now projected for later in the year than was previously expected. While markets seemed surprised by this news, I was not (higher rates prop up the dollar). And, the SCMP reported that central bank gold stockpiling is expected to continue in 2024: “Central-bank buying maintained a breakneck pace, with annual net purchases of 1,037 tons last year, just 45 tons shy of the record set in 2022, the WGC said in the report. It expects central-bank buying to top 500 tons this year.”
Things I’m keeping an eye on:
1. Farmer protests: My last post covered protests in Germany, the Netherlands, and France. Since then, Italian farmers, Bulgarian farmers, and Spanish farmers also joined in (see image below). On February 1, “angry farmers descended on Brussels to protest [the] EU summit”, and on this past Tuesday February 6th, EU officials made concessions “to the farmers who have spooked EU governments” (they “scrapped” a plan to halve the use of pesticides and “left out targets for the agricultural sector from a road map on how the bloc should cut its greenhouse gas emissions by 90 per cent by 2040”).
(Image: “Farmers use their tractors to block the C-33 highway as they drive to Barcelona during a protest over price pressures, taxes and green regulation, grievances shared by farmers across Europe, in Barcelona, Spain, February 7, 2024.” From Reuters, 2/8/2024, here).
2. Banks and real estate: Nonperforming loans are cutting into earnings for US banks, including New York Community Bancorp which last week reported major losses on commercial real estate (CRE) loans: “The US regional bank index as a whole has fallen more than 10 per cent since NYCB announced its higher CRE provisions and writedowns, and a handful have lost 15 per cent or more”. FT reported this week that the “CRE blues” were quickly spreading globally, including to German and Japanese banks, and that the banks hardest hit so far have had large exposures to CRE and/or multifamily residential housing.
The FT article also made a comment that relates to the discussion above about the dollar and interest rates, and sheds light on the monetary policy trap in which the US now finds itself: “One thing we know for sure: CRE lenders are praying, hard, that the Fed starts cutting rates soon, and cuts them by a lot.” If the US lowers rates, the dollar will collapse, but if it keeps them high, the banking sector will deteriorate, alongside other parts of the economy that rely on cheaper credit. (This trap in which the US now finds itself is called the “open economy trilemma” and I wrote about it previously, here; see also my post from April on the CRE problem.)