⊗

While the US dollar has long enjoyed a dominant position in the global financial system, the recent shift toward dedollarisation constitutes a critical transformation with enormous potential consequences for the future of international trade, investment, and monetary policy. The US dollar is the prominent reserve currency, a status cemented in the aftermath of World War II with the establishment of the Bretton Woods system, but many recent developments show that the dollar is no longer the only player in town. For various reasons, countries have attempted to dethrone the dollar as the global reserve currency for many decades. However, efforts to dedollarise have accelerated recently, following the imposition of multiple sanctions that restricted the use of the dollar to purchase oil and other goods from Russia, where the Chinese yuan is considered the primary option due to China's widening economic power. Dedollarisation, as the name implies, refers to the process by which countries diminish their reliance on the US dollar as a reserve currency, medium of exchange, and unit of account. Geopolitical risks and economic dynamics have accelerated the trend away from the greenback, with more and more countries — from Brazil to Southeast Asian nations — calling for trade to be carried out in other currencies. As covered in a flurry of stories recently across all major media, the BRICS countries - made up of Brazil, Russia, India, China and South Africa - are mulling creating a new currency to facilitate trade. Malaysia too has proposed creation of an Asian Monetary Fund to reduce dependence on the US dollar, an idea also welcomed by Chinese president Xi Jinping. And this is just to name a few. In step with commodities For decades, the US dollar has reigned supreme in global trade, not only because the US is the world's largest economy but also because oil, a key commodity required by all countries great and small, is priced in the greenback. The majority of commodities are likewise priced and swapped in dollars. "Shipping will be USD-dominated as long as commodities markets are,” reckons Alex Saverys, chief executive of Compagnie Maritime Belge (CMB). When it comes to shipowners, all their assets are priced in dollars; loans, in general, are similarly priced in dollars; freight or time charter revenue is also priced in dollars; and most of the costs, once again, are priced in dollars. "In a manner of speaking, the USD is our natural currency, and we are naturally hedged as asset value, income stream, borrowing costs, and other expenses are all in USD," explains Khalid Hashim, the managing director of Thai dry bulk owner Precious Shipping. "To date, we have not seen anyone asking us for freight or time charter hire to be paid or priced in any other currency other than USD," he assures. Besides regular home-country currency "mismatch" and forex gains or losses, Hashim sees no other real upsides or downsides for the maritime business, something veteran ship financier Dagfinn Lunde of eShipFinance.com also points out by saying: "The problem for a shipowner is that expenses might not all be in USD even if the income is in USD." Lunde reckons dedollarisation will not move very quickly but cautions the industry to think ahead, remembering when the UK pound went through the huge devaluation that started in 1967 and lasted until it was worth some 50% less in 1982. "I came into shipping in 1976, and people were still being hurt under their long term charters if they had not already gone bankrupt. I am a bit amazed that people do not today think more forward and have or get an escape clause, for example, when they enter an LNG 12- to 15-year charter." He notes that currencies tend to go through dramatic changes every 30 to 50 years - so in those terms things could happen again in the not-too-distant future. "Not to scare people, but it does not hurt to think a bit ahead," Lunde says. For Basil Karatzas, CEO of maritime consultancy and shipping finance firm Karatzas Marine Advisors, finding an alternative currency that is also a medium for the storage of value and is also relatively stable will be hard. "The euro is one election away from becoming a plaything for Putin, despite having been saved by Draghi in the last decade by holding the EU together. Renminbi is not a reliable currency, especially now that Xi tilts towards autocracy. The pound and Swiss franc are too limited as their economies are peripheral," he says. Goldfinger Karatzas finds that now, with a "big grey fleet", some shipowners, cargo owners and traders could be motivated to do away with the dollar and are prepared to live without the dollar as the US Treasury could block them from the Fed system at any minute. However, he points out that settling issues will take more than just bartering, something China and Iran have been doing. "Unless they go back to trading in gold and have these shadow fleet players deal in bricks of gold bullion and, like Goldfinger in the James Bond movie, are moving gold over borders in the form of a gold-made Rolls Royce or in briefcases in bullion," he says. Since the Federal Reserve's aggressive rate hikes to combat domestic inflation, many central banks across the world have boosted interest rates to prevent capital outflows and a rapid devaluation of their own currencies. Data from the International Monetary Fund (IMF) shows that the dollar accounted for around 58% of global foreign exchange reserves in Q4 last year, down from 73% in 2001. Comparatively, the euro is a distant second, accounting for about 20% of global forex reserves, while the Chinese yuan accounted for just 2.7% in the same period. Regardless of the slow erosion of its hegemony, the dollar is still the king and is not expected to be dethroned in the near future — simply because there aren’t any alternatives right now. "I'm not sure if the world is ready for life after the USD, as much as there is wishful thinking and desire, and indeed currencies like the euro and Remnimbi have marginally chipped away at the USD trade volume," says Karatzas. "Despite major structural shifts in the international monetary system over the past six decades, the USD remains the dominant international reserve currency, and any changes to its status are likely to emerge in the long run," the International Monetary Fund noted. "Don’t believe it for a moment," says Michael Parker, Citi's famous ship finance veteran and chairman of the Poseidon Principles group of financiers. "No doubt some people would like it, but you will need to see a deep distrust in the US and its economy for this to get any traction," he tells Splash Extra. Commenting via LinkedIn, FX industry veteran Beat Nussbaumer and founder of forex trading tutoring platform Marco Beat stressed recently: "Without actually truly understanding the nature of currencies and currency systems, be it the closed CNY and its dirty float, the US PEG regimes of the Middle East, or the unreliable South American currencies like BRL and ARS, I suggest all those that keep on drumming this topic to first look at the true details. Forget what you think about the US or its policy; this is not about grief you feel or do not feel; this is just about facts. So once you understand currencies and FX regimes, you will understand that the USD will be the major currency for decades to come."

Dedollarisation and what it means for shipping

Is the greenback’s global reign under threat? Splash Extra investigates.

⊗

To continue reading, please login below or subscribe here.

Read Next

Owners advised to cash in

Measuring shipping hubs

April 2024 Review

The on/off risk premium for tankers

Curse of the dry cargo optimist

Owners advised to cash in

Measuring shipping hubs

April 2024 Review

The on/off risk premium for tankers

Curse of the dry cargo optimist

Maritime CEO Forum Singapore

Maritime CEO Forum Monaco

Advertising

Press Releases

Splash

Splash Extra

Splash Special Reports