The Rocky Dollar/Rand Picture Show: Is de-dollarisation a fad or a trend here to stay?

This article was first published in Afrikaans as ‘Is de-dollarisasie ‘n gier, of gaan dit bly?’ in the Landbouweekblad magazine and on its website. It is available to Landbouweekblad subscribers here.

As the world’s premier reserve currency, the US dollar can essentially be regarded as the default currency in international trade and a global unit of account. As a result, every central bank, Treasury/exchequer, and major corporate across the globe holds a large portion of their foreign exchange holdings in US dollars. However, this generalised historical trend appears to be deviating from its standard showing of late. De-dollarisation is a term used to describe the gradual reduction in the dominance of the US dollar as a global reserve currency and medium of exchange. It has been a topic of discussion and analysis for several years, and its future trajectory is debated among economists and analysts.

Overall, there appears to be a slow (albeit steady) emergence of evidence pointing towards a generalised de-dollarisation trend. At the beginning of April, China and Brazil agreed to a deal to see trade between the two countries conducted in their currencies and not the US dollar, as it is still widespread. This is not a small measure, particularly for Brazil, given that China is its largest trading partner. It follows other similar actions, some of which have been caused by the US itself due to the sanctions levied on Russia (as inevitable as they were). Nonetheless, the switch from US dollars to a yuan-real settlement basis in China-Brazil trade is only the latest in a growing trend. Debates around a more politically neutral reserve currency have gone on for decades. However, the profound economic disruption experienced by Iran and, more recently, Russia after being evicted from dollar-based trading systems like SWIFT has led many nations to consider imminent contingency plans. India and Malaysia, for example, have recently begun using the Indian rupee to settle certain trades, and there is growing rhetoric around Saudi Arabia and other energy exporters moving away from the dollar. In that same vein, China also recently executed a test trade for natural gas with France settled in yuan.

Closer to home, one of the most significant objectives the increasingly influential BRICS (Brazil, Russia, India, China, and SA) nations appear to be working to achieve is a shift away from reliance on the US dollar. Even before Russia invaded Ukraine, which seems to have expedited de-dollarisation initiatives across much of the non-Western world, Russia and China had embarked on clear policies of local-currency promotion (invariably at the dollar’s expense) as their relationships with the US continued to deteriorate. But it is not just in trade invoicing where this slow de-dollarisation trend has occurred. It can also be observed in global foreign exchange reserve holdings as more central banks have shifted away from the dollar. But, of course, there is still a massive gap between the trade in goods, services and financial claims done in US dollars and those in other currencies.

Naturally, the big question at the end of the day is that if this apparent de-dollarisation is here to stay, what are some possible effects on South Africa’s (SA) agricultural sector? Well, de-dollarisation could have several implications for the agricultural industry, both positive and negative, depending on the specific circumstances and the extent of de-dollarisation. First, it could result in increased currency volatility and fluctuations in exchange rates – this, in turn, would make export earnings more volatile and difficult to predict. De-dollarisation could also lead to changes in trade relationships and patterns. As countries reduce their reliance on the US dollar, they may seek to establish trade agreements that use alternative currencies or payment systems. This could impact agricultural exporters who have traditionally relied on US dollar-denominated transactions. It might require adapting to new payment mechanisms or establishing new trade relationships. Moreover, de-dollarisation will likely influence commodity prices.

Changes in currency values and exchange rates can affect the cost of inputs such as fertilisers, machinery, and fuel, which could impact agricultural production costs. Positively, however, de-dollarisation could stimulate regional economic integration and trade within specific regions. Countries seeking to reduce their reliance on the US dollar may promote regional trade agreements and use regional currencies or payment systems. This could lead to increased agricultural trade within regional blocs and greater coordination on agricultural policies and regulations – something SA could benefit greatly from with the right policy framework and geo-political relations.

Nonetheless, it is important to note that the extent and impact of de-dollarisation on the agricultural sector will extend beyond just these few factors – these are just a few key examples. The extent will depend on the specific policies, actions, and strategies countries and regions adopt. The agricultural industry is highly interconnected with global markets. It depends on stable and efficient financial systems, making any significant changes in currency dynamics likely to have implications for agricultural producers, traders, and consumers.

Still, it is well worth remembering that simply replacing the fiat currency of the largest economy in the world with the fiat currency of some other smaller economy is hardly a viable replacement strategy. Moving away from the dollar brings substantial barriers to exit and network effects to overcome owing to historical, technological, financial, and habitual obstacles. At the end of the day, the US dollar is the de facto currency of East Timor, Ecuador, El Salvador, the Federated States of Micronesia, the Marshall Islands, Palau, Panama, and Zimbabwe. Furthermore, the relatively transparent conduct of monetary policy in the US has led no less than 22 foreign central banks and currency boards to peg their currencies to it. In the long term (and we mean very long term), if US efforts to supply dollars are supplemented by lower demand for dollars (due to de-dollarisation), then the scope for dollar strength to emerge and, in turn, weaken other global currencies – and thus lift global inflation – will be reduced. Still, we believe that a strong US dollar (in whatever shape or form) will be around for a long time to come. However, the more instances we see of weaponising US dollar dominance and permitting expanding mandates to disorient US monetary policy, the greater the de-dollarisation trend will be.

Ultimately, whether de-dollarisation becomes a lasting trend or fades away as a fad will depend on various factors, including the actions of major economies, the stability of the global financial system, and the emergence of viable alternatives. The trend of reduced reliance on the US dollar may continue to evolve, but it is unlikely to happen rapidly or entirely in the foreseeable future.

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