Is the US Dollar at risk?

The US Dollar is as synonymous to us in life as the morning and night is. It has dominated as a reserve currency for decades. It’s paved the way for the United States to become the superpower that it is today, and be able to wield influence around the world, as it sees to work with other nations by investing or ramp up trade to keep the status quo intact and prefer their influence for years to come. However, is that changing?

One of the main reasons the United States has been able to stay relevant, is by making sure that the dollar is the reserve currency of the world, which allows it to be used as the preferred method of payment for all commerce, in particular the trade of energy and in specifics OIL. This is widely known as the Petro Dollar. The emergence of the petrodollar dates back to the early 1970s when the U.S. reached an agreement with Saudi Arabia to standardize the sale of oil based on the U.S. dollar. Petrodollar recycling creates demand for U.S. assets when dollars received for oil sales are used to buy investments in the United States.

Saudi Arabia wants to sell its oil in yuan, not dollars

Saudi Arabia, which sells a quarter of its exports to China, is considering making these sales in yuan, the Wall Street Journal reported earlier this week. These negotiations, which have surged and ebbed over the last half-decade, are not likely to fructify soon. To begin with, China over the last few years has grown to be the main rival to compete for the world’s main superpower, to do so, they understand that they not only need to build a strong economy but they also need to have a strong trade presence and more importantly be less dependent on the dollar or systems built by the West, for years they have talked about ways of paying for oil in Yuan and now they seem to have found a willing seller in Saudi Arabia. However, its complicated, as by Saudi Arabia doing so, it would hurt the dollar and by direct attempt will also hurt its own economy. Samanth Subramanian, editor of The Quartz advises why this is not straightforward. “For one, Saudi Arabia pegs its riyal to the dollar, so any damage inadvertently dealt to the dollar will hurt its own currency. But the US’ geopolitical hegemony is based so significantly on the petrodollar—with 80% of global oil transactions denominated in dollars”

“If the yuan displaces the dollar to a sufficient degree in the annual $14 trillion global oil trade—although what that sufficient degree would be is difficult to say—countries will have to maintain yuan reserves instead. (At the moment, 2.48% of the world’s reserves are held in yuan, compared to 55% for the dollar, according to IMF data.) Oil producers receiving yuan would have to spend it on Chinese debt and imports, further strengthening China’s economy, but if the world was particularly awash in yuan, other trade might start to be yuan-denominated: metals, say, or soybeans.”

At the turn of the news the Chinese yuan reversed earlier declines and jumped toward its highs of the day following a report by Dow Jones that Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in the currency. The offshore yuan climbed as much as 0.1% to 6.3867 per dollar, close to the session peak it reached during Asian trading. The currency had weakened as much as 0.3% in U.S. trading before the report on Saudi Arabia.

To preserve the yuan’s new role, China would have to ensure political stability and financial transparency, of the kind the US promised in the 20th century. This would signal a change of tact currently not been seen by “People’s Republic of China”

Sources: Al Jazeera, The Quartz, Investopedia