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The end of King Dollar? The forces at play in de-dollarisation




LONDON, (Reuters) – Rivalry with China, fallout from Russia’s war in Ukraine and wrangling once again in Washington over the U.S. debt ceiling have put the dollar’s status as the world’s dominant currency under fresh scrutiny.

Russia’s sanctions-imposed exile from global financial systems last year also fuelled speculation that non-U.S. allies would diversify away from dollars.

Below are some arguments why de-dollarisation will happen – or possibly why it won’t.

SLIPPING RESERVE STATUS

The dollar share of official FX reserves fell to a 20-year low of 58% in the fourth quarter of 2022, according to International Monetary Fund data.

Stephen Jen, CEO of Eurizon SLJ Capital Limited, said that shift was more pronounced when adjusted for exchange rate.

“What happened in 2022 was a very sharp plummeting in the dollar share in real-terms,” Jen said, adding this was a reaction to the freezing of half of Russia’s $640 billion in gold and FX reserves following its 2022 invasion of Ukraine. This had sparked a re-think in countries such as Saudi Arabia, China, India and Turkey about diversifying to other currencies.

Reuters Graphics
Reuters Graphics

TAKING THE LONGER VIEW

The dollar share of central banks’ foreign reserves in the final quarter of 2022 did hit a two-decade low, but the move has been gradual and it is now at almost a similar level as 1995.

Central banks put rainy day funds in dollars in case they need to prop up exchange rates during economic crises. If a currency weakens too far against the dollar, oil and other commodities traded in the U.S. currency become expensive, raising living costs and fuelling inflation.

Many currencies, from the Hong Kong dollar to the Panama balboa, are pegged against the dollar for similar reasons.

Reuters Graphics Reuters Graphics
Reuters Graphics Reuters Graphics

WANING GRIP ON COMMODITIES

The almighty dollar has had a lock on commodity trading, allowing Washington to hinder market access for producer nations from Russia to Venezuela and Iran.

But trade is shifting. India is purchasing Russian oil in UAE dirham and roubles. China switched to the yuan to buy some $88 billion worth of Russian oil, coal and metals. Chinese national oil company CNOOC and France’s TotalEnergies completed their first yuan-settled LNG trade in March.

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After Russia, nations are questioning “what if you fall on the wrong side of sanctions?” said BNY Mellon strategist Geoffrey Yu.

The yuan’s share of global over-the-counter forex transactions rose from almost nothing 15 years ago to 7%, according to the Bank for International Settlements (BIS).


Reuters Graphics
Reuters Graphics

BUT TOO COMPLEX A SYSTEM

De-dollarisation would require a vast and complex network of exporters, importers, currency traders, debt issuers and lenders to independently decide to use other currencies. Unlikely.

The dollar is on one side of almost 90% of global forex transactions, representing about $6.6 trillion in 2022, accordingto BIS data.

About half of all offshore debt is in dollars, the BIS said, and half of all global trade is invoiced in dollars.

The dollar’s functions “all reinforce each other”, said Berkeley economics and political science professor Barry Eichengreen.

“There just isn’t a mechanism for getting banks and firms and governments all to change their behaviours at the same time.”

Reuters Graphics
Reuters Graphics

A FRAGMENTED FUTURE

While there may not be a single dollar successor, mushrooming alternatives could create a multipolar world.

BNY Mellon’s Yu said nations were realizing that one or two dominant reserve asset blocks was “just not diversified enough.”

Global central banks are looking at a wider variety of assets, including corporate debt, tangible assets such as real estate, and other currencies.

“This is the process that is underway,” said Mark Tinker, managing director of Toscafund Hong Kong. “The dollar is going to be used less in the global system.”

AN UNSHAKEABLE BASIS

Because large bank deposits are not always insured, businesses use government bonds as a cash alternative. The dollar’s status is therefore underpinned by the $23 trillion U.S. Treasury market – viewed as a safe haven for money.

“The depth, liquidity and safety of the Treasury market is a big reason why the dollar is a leading reserve currency,” said Brad Setser, a Council on Foreign Relations fellow who tracks cross-border currency flows.

International holdings of Treasuries are vast and there’s no credible alternative yet. Germany’s bond market is relatively small, at just over $2 trillion.

Commodities producers may agree to trade with China in yuan, but recycling cash into Chinese government bonds remains tricky due to difficulties opening accounts and regulatory uncertainty.

“But you can hop on an app and trade Treasuries from anywhere,” Natwest Markets emerging markets strategist Galvin Chia said.

Reuters Graphics
Reuters Graphics

($1 = 6.9121 Chinese yuan renminbi)

Reporting by Naomi Rovnick and Libby George, editing by Karin Strohecker and Alex Richardson


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Politics

WFP help build resilience in Zimbabwe’s rural communities




HARARE – The United Nations World Food Programme (WFP) today welcomes an US$8.7 million contribution from the United States to power its resilience building activities for more than 65,000 people in five food insecure communities for the next six months.

The contribution, provided through the United States Agency for International Development (USAID), comes at a critical time in Zimbabwe. It will be used to provide participants under WFP’s Food Assistance for Assets activities with food assistance in return for work, support the creation or rehabilitation of small-scale farming infrastructure, village savings and lending groups, as well as provide training on business management in Kariba, Masvingo, Mwenezi, Rushinga and Zvishavane districts.

“Our longstanding funding for the Food Assistance for Assets program demonstrates the U.S. government’s commitment to tackling food insecurity in Zimbabwe,” said Ramses Gauthier, USAID acting Mission Director. “We are happy to work with a ready, willing, and capable partner, the World Food Programme, to accomplish this vital task.”

Under the initiative, which is designed to meet immediate food needs through food distributions while investing in productive assets, participants receive monthly food allotments consisting of maize meal, pulses, and cooking oil for the duration of the work while the entire community benefits from the completed assets. Participants also receive training on insurance and financial inclusion and food processing and are linked to nearby markets.


“We are grateful to the U.S. government for its continued support in enabling vulnerable communities in Zimbabwe to withstand the negative impact of climate change and recurrent economic shocks,” said Christine Mendes, WFP acting Country Director. “The beauty of transformational activities lies in empowering communities not only to have food today and tomorrow but also to prevent and mitigate future food crises, as well reduce humanitarian needs over time, while paving the way toward self-sufficient futures.”

The United States’ support comes at a critical time, as farmers across the country harvest their cereals. Although the country has received good rains this agricultural season, many families still face food insecurity. Some smallholder farmers live hand-to-mouth due to the cumulative effects of droughts, insufficient livelihood opportunities, and economic shocks.

Since 2011, through its resilience building activities, more than 1.2 million people in 30 districts have benefitted from WFP-supported productive assets. WFP has created approximately 400 small dams and 80 irrigation systems, helped establish 520 hectares of vegetable gardens, and drilled more than 60 mostly solar-powered boreholes.

USAID remains the largest donor of humanitarian assistance in Zimbabwe and supports sustainable solutions for communities affected by food insecurity.

The United Nations World Food Programme is the world’s largest humanitarian organization, saving lives in emergencies and using food assistance to build a pathway to peace, stability and prosperity for people recovering from conflict, disasters and the impact of climate change.


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Politics

Zimbabwe Central Bank Sees Foreign Exchange Rate Converging With Black Market




HARARE — Zimbabwe’s central bank sees “near convergence” of the country’s official and black-market foreign-exchange rates, after a currency rout led to a 58% slump against the US dollar this month.

Measures announced by Finance Minister Mthuli Ncube this week are expected to help provide stability to the exchange rate, according to John Mangudya, the Reserve Bank of Zimbabwe governor.

“We see this happening in the shortest period,” he said Tuesday in an interview by phone from the capital, Harare. “As of this week, we have already seen a softening of the parallel exchange rate, which was running away.”

The local currency has fallen to officially trade at 2,577 per US dollar, which compares to a still much weaker 3,200 to 3,600 on the unofficial market. The official rate is set at weekly auctions, where the central bank will start capping dollar sales to $5 million.

The limited dollars at the auction will force companies seeking US currency to place “realistic” bids, Mangudya said. “We see near convergence of rates, that’s because I am mindful that a parallel market exists worldwide,” he said. “Anything under 20% is acceptable.”


The International Monetary Fund recently urged authorities to free-float the local currency, but Mangudya ruled that out, saying it would be difficult to achieve in a dual currency system. Three-quarters of transactions in the country use US dollars.

Read: Zimbabwe Rules Out Free-Floating Currency After 26% Slump

Instead, the southern African nation intends to stick with its unconventional policy of issuing gold coins and gold-backed digital tokens as it remains cut off from access to lines of credit from international financial institutions including the IMF, World Bank and Paris Club. The digital money move has been criticized by the IMF.

“We are customizing our policies,” said Mangudya. “We don’t get IMF support and have limited foreign credit, so we need to think outside the box and maximize the tools at our disposal.”

A second phase of the digital currency, which allows for everyday transactions between ordinary people and businesses, is currently in a “testing environment” and will be launched in mid-June. “People will be able to swipe in the realm of gold and also send transfers,” said Mangudya. – Bloomberg


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Politics

Ice Cube faces backlash after describing A.I. as ‘demonic’

Ice Cube


Rapper Ice Cube is the latest high profile figure to speak out against generative Artificial Intelligence (A.I.).

The veteran Compton, California, rapper recently responded to a Tweet challenging his point of view by doubling down on his recent claim that A.I. was demonic.

After a Twitter user by the name of David Robbins cited an article by Fortune magazine that sought to make a case that Cube was a hypocrite for criticising A.I. during an interview on the Full Send podcast on the basis that Cube has a history of sampling other music, Cube fired back.

“Samples are approved or denied by the song owners,” he said. “Totally different than taking a dead artist and making a new song they never approved and saying things they may not agree with. That’s evil and demonic to me.”

Previously, during the aforementioned interview, Cube had sparked controversy online when he shared his controversial views on the matter, “I think A.I. is demonic. I think there’s gonna be a backlash because of A.I. I think people are gonna want things organic and not artificial.”


His tweet drew a range of responses:

“So the dead artists you’ve sampled who don’t own their songs due to slave contracts and may not agree with what you are saying on the record; yet you got the greenlight to sample it,” said @360_karma.

“But the beef is with A.I. music ? Run that back one more time and make it make sense.”

@visisyd added: “agree to a point,.. depending on the context of lyrics and intent tho. I had the idea years ago before the technology existed,.. wanting something creative for my vocals and it actually work with the concept behind my music.”

@reallythough described A.I. tech as inevitable. “Nothing demonic about simply using new tech to play around with voices you love from artists who put out recordings O.G. Completely inevitable actually. Dead that weird thinking.”

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