The decline in the value of the US dollar : Connecting the Dots on Global Economic Shifts

It’s good to know what is happening in the world—and even better to know what will happen next.  As you look around, take some time to connect the dots that matter. Then imagine what they mean for you, your organization, your industry, your country.

Here is one dot you may have caught: In early April, Saudi Arabia, Russia, Iran and other members of OPEC+ cut oil production, and predictably the price went up. That in itself is not unusual.

But another dot took place some 8 weeks earlier. The Saudi Crown Prince decided to sell oil to China in Chinese currency, the renminbi, instead of the US dollar. Russia has already been doing it. Iran joined the change, and a few more countries have begun to express their preference for Rmb. Now let us connect the two dots: Energy is at the heart of any economy. How it is priced and controlled has a significant effect on the global economy and the movement of currencies.

The Rmb the Saudis receive in exchange for oil will be deposited only with the Chinese. Thus China gets oil without incurring an outflow of its currency. You get the hang of it!

So what does it mean?

The US will miss the dollars it used to get when the Saudi’s sold oil in US dollars only. How would parity of the US dollar against other currencies be affected?

As other countries join China’s economic bloc or sphere of influence, they and their industries could receive energy at discounted prices. Some industries in the West that are highly dependent on energy would likely be at a competitive disadvantage against those businesses in the Chinese bloc.

Would it affect inflation and the Fed’s ability to tame it? Energy is an important component of cost for nearly every business. Inflation could persist longer at higher rates. Would food follow a similar path?

And what happens to the dollar as the world’s reserve currency some 15 years out if China’s sphere of influence exponentially expands its use of Rmb for trade settlements?  In an April 12, 2023 Financial Times article headlined “Renminbi’s share of trade finance doubles since start of Ukraine war,” journalists Hudson Lockett and Cheng Leng note the percentage increased from less than 2 percent in February 2022 to 4.5 percent a year later.

That percentage of trade is still small, but financial implications will likely drive the Rmb’s uptake. Lockett and Leng quote the global chief economist at Bank of China International saying “the renminbi’s role has changed from a high interest rate currency into a low interest rate currency.” They also cite a research paper from Zhang Ming, deputy director of the Department of International Finance at the Chinese Academy of Social Sciences, that says the Chinese central bank has begun aggressively pushing for greater use of the currency in settlement of cross-border commodities trade.

CEOs should read the signals and be thinking future-back, imagining new business models and scenarios.

Lastly, they should adjust their mindset to the mega shift the dots portend. The world order as we know it is permanently changed. Three spheres of influence are emerging–US and West anchored, China anchored, and “floaters” or opportunists. The US one has military readiness and technological superiority. The Chinese sphere has tight economic transactions, like lending, accumulating trade surplus, and control of natural resources.

More changes will come as the US and China continue to act and react to each other. Read the signals and be ready.

Author: Ram Charan