It's no surprise that some countries want an end to 'dollar dominance'

An Egyptian woman waits outside a currency exchange office in Cairo, 2022. The US dollar today represents 58 per cent of the value of foreign reserve holdings worldwide. EPA

Few issues are as consequential – or as contentious – as the way in which countries, companies and individuals do business across national borders. As the International Monetary Fund, World Bank and G20 finance ministers hold important meetings in Washington this week, the US dollar and the western-led payments system continue to dominate global trade, much as they have done since the end of the Second World War.

The dollar today represents 58 per cent of the value of foreign reserve holdings worldwide; the second-most-used currency, the euro, comprises only 20 per cent. Earlier this month, a Chatham House paper described the dollar as being to international finance “what the English language is to international communication”. Belgium-based Swift, the world’s leading interbank messaging system, works with 11,000 institutions and accounts for $150 trillion in transactions each year.

However, as the world becomes increasingly multipolar, the vulnerabilities that arise from over-reliance on one currency or, indeed, western banks have meant several leading and ambitious economies are investing in efforts to explore alternatives. The Brics group of nations, which is convening for a two-day summit in the Russian city of Kazan is a good example of this. It is already a consequential body on the world stage, its current members account for close to 45 per cent of the global population and if observer member Saudi Arabia were to join, the Brics nations would account for 44 per cent of global crude-oil production.

Therefore it is understandable that further discussions are expected on setting up a new model of international payments – the Brics Bridge. This proposed platform of digital currencies would expand opportunities and make it more difficult to isolate any one country’s banking sector from the global economy.

Advocates for an alternative system point out that in a dollar-dependent world, sanctions are often only meted out to those who cross Washington’s interests. That one-sidedness does little to inspire trust among countries caught in the middle of great power politics. More importantly, the global economy has become more diverse and requires flexibility and variety to match.

The system under discussion at the Brics summit, moreover, is similar to another cross-border multi-central bank digital currency project called mBridge, under trial since 2019. This attempt to reduce the time and costs involved in making international transactions involves the central banks in the UAE, China and Thailand, and the monetary authority of Hong Kong, as well as the Basel-based Bank for International Settlements, which has been a lynchpin of the western-led international financial order since its foundation in 1930. Saudi Arabia joined the project in June.

The Cold War ended 33 years ago, and it is unrealistic to think that a world in transition would permanently adhere to one national currency and banking system for globalised trade. In addition, having international payments and credit intrinsically bound up with a western-dominated banking system also gives those countries that control it a huge amount of leverage on the international stage. Given the above, it should not surprise anyone that projects like the Brics Bridge are emerging.

The exploration of different digital currencies and payments systems could also speed up the tentative moves away from the US dollar that are already taking place. According to the IMF, although the dollar remains the world’s pre-eminent reserve currency it “continues to cede ground to non-traditional currencies in global foreign exchange reserves”. The Fund also adds that if the Brics group makes tangible progress on its digital currency ambitions, the resulting “economic fragmentation and the potential reorganisation of global economic and financial activity into separate, non-overlapping blocs could encourage some countries to use and hold other international and reserve currencies”. Those interested in international finance and trade should keep a close eye on Kazan over the next two days.