Issued by the Federal Reserve (Fed), the US dollar is the official currency of the United States. It is the number one most traded currency globally, accounting for a daily average volume of US$ 2.9 Trillion.
There are several reasons for its wide spread popularity and global acceptability. Firstly, the US is the world’s largest economy and a powerhouse in the international trade. Secondly, the US dollar is the world’s primary ‘reserve currency’, held by the central and commercial banks all over the world, for the purpose of the international transactions and investment, estimated to make up nearly 63% of currency reserves by volume. Thirdly, many commodities are priced in US dollar, including gold, crude oil and copper in the international market.
While the value of the dollar is primarily influenced by US economic performance and demand for the commodities, its value can also be influenced by fluctuations in the economic performance of other countries that use the dollar, either officially or as their de facto currency. These countries include Ecuador, Panama and El Salvador, among others.
Random movements in national exchange rates particularly against major global invoicing currencies such as US dollar, euro, pound sterling, swiss franc, yen, etc. cause uncertainty in export proceeds and timely import payments.
Along with other hedging instruments, trade in local currency instead of global invoicing currencies could mitigate the adverse impacts of exchange rate volatility in the developing countries. Countries have explored the use of national currencies through various arrangements including currency swap arrangements and bilateral trade arrangements. India’s rupee trade with Russia, East European countries, Nepal, Iran and other countries in the past is one such example. This scheme, which was actually conceived as a trade policy instrument in the 1950s through 1980s during the times when India faced severe foreign exchange constraint, is now being considered as a generalised policy option for mitigating exchange rate – related risks in the regional bloc trade.
Switching from the US dollar to trade in national currencies is one of the most prospective areas of cooperation for the Shanghai Cooperation Organisation (SCO), according to Russian Prime Minister Mikhail Mishustin.
Speaking at an SCO meeting on Monday, Mishustin said the “development of alternative, dollar – independent settlements” is an important issue. “We consider it promising to expand the practice of mutual settlements in national currencies,” he stated. The PM stressed that the members of the organisation should work on a coordinated approach on the matter and further discuss the funding mechanism for the SCO projects.
During the SCO summit held earlier this month, one member of the group, Kazakhstan, also voiced support for boosting trade in national currencies between the partners. President Kassym-Jomart Tokayev said unlocking the economic potential of the alliance is an urgent task given the rise in protectionism and the disruption of international supply chains. Creating a roadmap for a gradual increase in the share of national currencies in mutual settlements as well as launching a Eurasian financial advisory mechanism could facilitate this task, he said.
The SCO was established in the year 2001 by six founding states – Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. Prior to that, all of the above countries, except for Uzbekistan, were members of a political association known as the Shanghai Five. The SCO has since expanded, with India and Pakistan receiving the status of full – fledged members in the year 2017. The member states are home to almost a half of the world’s population and account for around one – fifth of global GDP. China has a greater interest in diminishing the hegemony of the US dollar and it tries to give loans to the aiding nations in its local currency.
Before the US sanctions were enforced on Iran, India and Iran had signed a rupee trade deal, wherein India used to import oil and export medicines, tea and world famous basmati rice to make their local delicacy ‘Pilaf’. Iran now imports its requirement of basmati rice from Pakistan in large quantities.
Will such trends take shape, time will tell how the new Potus will react?