Confidence in the U.S. dollar, which is the key currency, is being lost, as signs of the dollar's departure from oil-producing countries such as Saudi Arabia and the introduction of the digital yuan, a crypto asset (virtual currency), are accelerating China's move toward currency supremacy. The United States has succeeded in building a system to recirculate the U.S. dollar through oil trading, but its footsteps are shaking. Under these circumstances, the Federal Reserve Board (FRB) announced that it will release a report on the Central Bank Digital Currency (CBDC) this summer. (Photo is Fed Chair Powell. Quoted from Yahoo image)
First, let's look back at the U.S. strategy of linking currency and oil trading. The trigger was the collapse of the Bretton Woods system, which said that the U.S. dollar could be exchanged for gold. In August 1971, then-U.S. President Nixon suddenly announced a suspension of the exchange of U.S. dollars for gold. This is the so-called "Nixon shock". The dollar, which moved to a floating exchange rate system in 1973, became paper money trusted by the U.S. government.
The Nixon shock did not discredit the dollar. The United States has turned its attention to energy trading. As mentioned above, the aim was to establish a petrodollar system. In the U.S.-Soviet Cold War structure, while the Soviet Union disappeared in the latter half of the 20th century, it is said that the reason why the United States could reign as the only superpower is due to the petrodollar system.
The general view is that the petrodollar system was created by the United States in collaboration with Saudi Arabia. In 1974, then U.S. Secretary of State Kissinger visited Riyadh, the capital of Saudi Arabia, and met with Crown Prince Fahd. They discussed oil settlement would be done by Saudi Arabia in dollars with every country, while in return the United States promised Saudi’s security. It was also called the "Washington-Riyadh Secret Agreement'' because the content of the meeting was not disclosed. According to estimates by the oil majors, the market size of petrodollars is estimated to be about $ 850 billion (based on 2017).
Now, here are the recent moves over dollar hegemony. In September 2019, it was reported that Russian oil giant Rosneft would use the euro instead of the U.S. dollar for settlements such as crude oil transactions. In mid-November 2020, Saudi Arabia's state-owned Saudi Aramco, the world's largest oil company, was informed that it would embark on the issuance of Chinese yuan-denominated bonds. It was when Mr. Joe Biden, who was expected to take office as the U.S. president, was eager to return to the Iran nuclear agreement. Speculation has also surfaced that the Saudi government, which is concerned that the U.S. Middle East policy will shift significantly from the former Trump administration, and has embarked on the use of the yuan to restrain the U.S..
"Digital RMB" that Xi Jinping led to the promotion of China, the State by the certification of legal currency, for the State of the underlying guarantee is also the case in the face of bankruptcy risk, and is more likely to spread at an accelerated pace . In mid-October 2020, China began a demonstration experiment in Guangdong Province to issue a digital yuan.
In recent years, the controversy over the introduction of crypto assets (virtual currency) has intensified. It all started when Facebook announced the virtual currency "Libra" concept (currently Diem) in June 2019. At that time, financial authorities in Europe and the United States restrained the introduction of Libra, claiming that it would adversely affect the existing financial system and become a hotbed for illegal remittances.
At the G20 Finance Ministers and Central Bank Governors' Meeting held in October 2019, there are serious risks to the digital currencies that Libra and others plan to issue, and each country will not approve the issuance. It was confirmed.
China, which hastened the issuance of digital yuan, is said to aim for issuance by the 2021 Beijing Winter Olympics. On the other hand, the European Union (EU), which was opposed to issuing Libra, has made a major shift toward the issuance of the digital euro by the ECB (European Central Bank).
Private companies such as the virtual currency "Diem" are also active. Facebook-led stable coin "Diem" may provide the central bank digital currency (CBDC) issuance infrastructure. Citibank, a major U.S. financial company, predicted in the report "Future of Money" released on April 15.
Fed Chair Powell emphasized in a video message from Washington on May 20 that FRB would seek public support for the introduction of the CBDC. With the Fed, which had a feeling of being late, started to move, the battle for currency hegemony in the world will become more fierce from now on.
Currency problems are likely to change the structure of international finance order. In order to maintain its position as a superpower, the United States will mobilize all means to defend its currency hegemony.
Jiro Arihara
Journalist based in Tokyo. In addition to approaching trends in international politics and the world economy from the perspective of resources such as energy, minerals, food & grain etc.
