SMM News: Aug. 9, market analyst Joaquin Monfort pointed out that in daily international transactions, more and more countries are trying to reduce their dependence on the dollar and switch to the euro or local currency for settlement. This trend may explain why the euro unexpectedly regained its resilience in 2019 before facing huge resistance from the European silver pigeon.
The euro unexpectedly became a winner against the dollar
The dollar is the world's largest reserve currency and is used in most transactions involving commodity trade, particularly oil, as well as in many international financial transactions and large transactions. However, international trade tensions could offset the dominance of the dollar. Russian President Vladimir Putin, for example, has promised to reduce his dependence on the dollar. Earlier, the United States imposed sanctions on Russia.
In this war against the dominance of the dollar, the euro unexpectedly became the winner. The euro has replaced the dollar in Russia's oil trade to some Asian countries. Andrey Biryukov, a market analyst, points out that Russian oil exports denominated in euros have grown for four consecutive quarters, while oil exports settled in dollars are falling. In Russia's oil trade with the European Union, the use of the euro almost exceeds that of the dollar. In addition, the volume of oil trade between Russia and India settled in rupees has also risen sharply, while the dollar's share of US imports has remained at about 1/3.
At present, the euro has almost surpassed the US dollar, becoming the preferred settlement currency for Russian exports to the European Union.
The euro has almost caught up with the dollar as the main settlement currency in Russia's trade with the European Union, according to data from the Russian central bank. As shown in the figure below, the white line represents the share of US dollar settlement and the black line represents the share of euro settlement.
More than half of Russia's $687.5 billion in annual trade is still settled in dollars, although Russia's direct trade with the US is less than 5 per cent.
Countries try to reduce their dependence on the dollar in payment systems
In addition to trade, countries are trying to reduce their dependence on the dollar in other ways, such as payment systems. Russia, for example, is also trying to diversify its payment systems, such as the creation of the SPFS payment system in 2014.
Given the growing threat of sanctions or tariffs from the United States, the European Union is also considering establishing a payment system independent of the SWIFT, said Timothy Alexander Guzman, an economist at the Center for Globalization Studies (CRG). German Foreign Minister Maas (Heiko Maas) recently called for the establishment of a new EU payment system, independent of the United States and SWIFT (Global Interbank Financial Telecommunications Association), and does not involve dollar payments. SWIFT, known as the Global Interbank Financial Telecommunications Association, is a dollar-based payment system.
Among the countries that trade with Russia, India is another country that reduces dollar payments. Of the $11 billion in trade between the two countries, 3/4 of the trade is settled in roubles. Earlier, the two countries agreed on a new way to pay in their own currencies.
In addition, India has paid for oil imports from Iran in rupees to circumvent US sanctions. Other countries bypassing the dollar include Iraq, Iran, Russia and Syria. As early as 2017, it was reported that Pakistan was also considering using other major international currencies to replace the dollar.
The refusal of a few countries to settle in dollars does not mean the end of the dollar's reserve currency status. However, this is a worrying sign, especially given the potential involvement of the EU and the growing trade tensions between the US and many of its partners. The more enemies the United States has, the more likely it is that these countries will refuse to use the dollar as an international settlement currency.
The euro has not plummeted, and the increase in dependence on it is partly due to the fact that the Bank of Europe has not plummeted.
The dollar is no longer the main reserve currency, and the growing reliance on the euro partly explains the fact that despite a 180-degree shift in ECB policy, which usually leads to a sharp devaluation of the euro, the euro unexpectedly showed some flexibility in 2019.
At the start of the year, the ECB was expected to raise interest rates by the end of 2019, but there was a quick shift. Markets later assumed that the ECB would not raise interest rates until 2020 and eventually expected to cut interest rates and QE.
Despite a sharp shift in market expectations for ECB policy, the euro did not fall as sharply as expected. Although the European Central Bank announced at its meeting on March 7 that it would extend its stimulus policy in the form of TLTRO, the euro fell to 1.1195 from 1.1305, but rebounded to a high of 1.1450 for the rest of March. Part of the reason may be that in international transactions, countries are increasingly using the euro instead of the dollar as the settlement currency.
According to the daily chart, the euro hit a high of 1.1412 against the dollar on June 24, and then fell all the way down to a low of 1.1027 on Aug. 1, although it has rebounded.
"Click to sign up for this summit
"Click to sign up for this summit
Scan QR code and apply to join SMM metal exchange group, please indicate company + name + main business