Dollar-denominated trade is the devil’s doughnut

Mirik Chapman is the CEO of Hedge Analytics and a former portfolio manager at Elliot Management and a bond strategist at UBS.

Published The Simpson Episode Shows Homer selling his soul for a donut. Thinking he can outwit the devil if he does not really finish it, Homer happily sings “I am wiser than the devil”. You can guess how it ended.

It is as difficult to escape the contractual term of the dollar in trade as it would have been for Homer to escape his promise to the Prince of Darkness. The Green plays a major role in international trade, both in the absolute sense and in relation to the U.S. share of global output.

So dominant is the dollar, that the end of dollar hegemony is a far-fetched chance comically. Satan’s contract is here to stay.

A vast history of how dollarization began helps to frame the likelihood of de-dollarization. After World War II the US was both the world’s largest economy and the only major economy to emerge unscathed. The choice of payment in dollars was the only rational response of international traders, as alternative economies such as the British pound or French franc were hit hard. In most cases, dollars were the first choice. And the unit to inspire the trust of sellers.

And not only commodity producers have adopted the dollar. As European economies have recovered, they are all aiming to generate profits in dollars through exports to America. The dollarization process appeared on the orders of non-American merchants, and not as a plan by the U.S. government to assimilate its currency into the global economy.

All of these benefits have remained, even though almost 80 years have passed. Just because we have economies that compete with the size of America does not mean that their currencies can compete with the dollar. An impartial acceptance is the key. In fact, over 80 percent of all international trade is iCharged in dollarsAccording to the Federal Reserve.

Only Europe opposes the trend, and this is due to euro invoices within the eurozone. This is a big box of donuts. Even if some trading becomes other currencies, the dollar is currently so dominant that it will have little significant effect for a very long time.

But who will make a denomination away from dollars? If it was attractive to do so, there is no reason why intermediate or manufactured products should not already be charged in another currency.

The reality is that this did not happen because the benefits do not match the costs. In fact, the only sectors that are worth renaming are those that include primary commodities traded by U.S. geo-strategic rivals. But denominated in non-dollar currencies for purely political reasons will only be part of the total trade in each resource.

Total exports of agricultural goods and extraction (mainly things we dig or extract from the ground) amounted to $ 4.9 billion in 2019 according to WTO and Unctad Estimates. The total combined trade in goods amounts to about 20 percent of the total export value. About 50% of the exports of agricultural goods are actually from developed countries and about 35% of the goods produced.

Some developed countries may seek to replace commodity contracts with their own (or other) currencies. But it will simply amount to an accounting exercise and will probably hardly affect the dominance of the dollar. For developing countries there may be some benefits from moving to Renminbi, but it is likely that the nominal trade rate in Renminbi will remain low, perhaps forever.

Does the US benefit from the dollarization? Surprisingly, the benefits may be relatively modest. The dollarization slightly increases the demand for dollars at the time of the transaction. But trade is a flow, not a stock. , Dollars are free to move around anywhere. The value of the dollar is almost unaffected.

And compared to the total international trade, and in particular the total currency turnover, the amounts are large, but not significant compared to the total daily turnover.

So one has to take with a pinch of salt Saudi Arabia’s latest proposals that it may replace some of the oil provinces to the yuan. And the excited talk about the dollar losing its grip as a reserve currency misses the point.

Any move from the dollar will, in terms of economic impact, be barely measurable, even if it produces vigorous headlines. And note that the Saudi proposal is only that “some” contracts will be transferred in red. The announcement looks more like a geopolitical ploy than a serious threat to the dollar.

The dollar is so widely used that only a change of many decades can have any effect. No one is smarter than the devil.

Dollar-denominated trade is the devil’s doughnut Source link Dollar-denominated trade is the devil’s doughnut

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