WEAKNESSES OF STRONG DOLLAR

The Russian-Ukrainian war has changed many global economic processes. Among other things, it has made relevant the problem of the dominance of the US dollar in trade relations between the countries. While Russia is trying its best to establish mutual settlements with other countries on the basis of national currencies and assures that it will put an end to dollar's hegemony, the US currency is getting stronger again.

In parallel, analysts argue that the US would only welcome a weaker dollar, as a strong one negatively affects trade transactions and increases the country's huge foreign debt.

Forced de-globalisation?

Almost every second resident in 64 countries believes that the US dollar will lose its global dominance in 25 years, according to a survey by Gallup International, the world's leading polling agency. And a third of respondents would like to see the EU as their country's economic partner.

According to Al Jazeera, many countries, including Russia, China, India, Argentina, Brazil, South Africa, as well as the Middle East and Southeast Asia, have already accelerated the studies of mechanisms to reduce dependence on the US dollar. However, according to analysts, it is too early to forget the dollar, as there is no adequate replacement for it yet.

According to SWIFT, although the share of the US currency in international settlements fell by 1.77pp in early 2023 (compared to the end of 2022), it still stands at an impressive 40.12%.

The global economic community has long been discussing de-globalisation and the formation of several global blocs. The IMF has already warned about the fragmentation of world amid the geopolitical upheaval and de-globalisation, which will only hinder the solution of common problems, such as climate change.

Even without geopolitical and economic crises, the dollar's role as the world's reserve currency is likely to weaken in the long term, according to the January report The Future of the World Monetary System by Credit Suisse. Analysts of the bank believe that the spread of floating exchange rates, the desire of central banks to reduce risks associated with sanctions and the availability of currency swap lines between central banks will contribute to this. At the same time, the emergence of a new global hegemon currency is unlikely, as it requires a high level of trust from each of the countries, Credit Suisse stated.

According to Reuters, India began undermining the long-standing dominance of the dollar in international oil trade as soon as it started buying Russian oil for UAE dirhams and roubles in the wake of sanctions.

According to the agency, oil deals with Moscow over the past three months have reached "several hundred million dollars". Some Dubai-based traders, as well as Gazprom and Rosneft, were seeking non-dollar payments for certain niche grades of Russian oil, which have been selling at above $60 a barrel in recent weeks. This is a small share of Russia's total sales to India which probably do not violate sanctions. Also, some Russian companies have switched to rupee settlements with Indian partners to avoid dependence on US dollars.

But the situation is not as smooth as it might appear at first glance. For example, the exporters of oil who switched to Indian rupees in payments have already had problems. Deutsche Bank estimates the monthly volume of Russian exports to India at $4-5 billion and imports from India at the hundreds of millions of dollars. At the same time, the Indian central bank does not give permission for trading in rupees on the Moscow exchange. Currently, there is simply nowhere to sell them in the required volume. Without the single currency for the countries of Asia and Africa, substituting the US dollar may be possible in the very distant future, experts conclude.

Got the power? What about investment?

The US dollar continues to lead the ranking of the most popular currencies for payments. According to the international system, Euro and British pound were the second and third leading currencies in January 2023. The Japanese yen and the Chinese yuan are in the top five as well. Compared with December, Euro's share rose from 36.34 to 37.88%, pound's from 6.08 to 6.57% and yen's from 2.88 to 3.15% in January 2023. At the same time, the share of yuan fell from 2.15% to 1.91%.

Incidentally, the US dollar hit a 20-year high last year thanks to the Federal Reserve's policy of raising interest rates, with high energy prices also playing a part. What happens next largely depends on whether inflation is brought under control and how soft the economy proves to be.

Some analysts believe that the dollar will begin to weaken sharply in the second half of this year, which will have a positive impact on the global economy. Moreover, a study by a group of economists at Société Générale suggests that the dollar will be the weakest of the G10 currencies, which are among the world's top 10 most widely traded currencies.

Yet, many experts argue that the dollar will remain strong for at least until the end of 2023, as it is regarded as the primary investment vehicle during the existing economic and political turmoil. When global investors invest in US dollars, they sell other currencies. Buying dollars raises the value of the dollar, while selling other currencies lowers their value, analysts said.

Why is the ongoing process with the dollar so important to producers and consumers around the world? In fact, many nations use this currency for imports and exports. The strength of the dollar directly affects the prices that consumers pay and the amount of profit that businesses can expect to make.

For example, in a country paying for imports in dollars, a more expensive dollar increases the cost of goods they buy abroad. This means that countries whose exports outweigh imports tend to benefit from a stronger dollar, and vice versa.

The US is observing the situation with no less apprehension. Multinational companies are particularly unhappy about strong dollar: according to Quincy Crosby, chief global strategist at LPL Financial, about 30% of all S&P 500 companies' revenues come from markets outside the US.

"The strong US dollar has been a drag on international earnings and stock performance for US investors," Wells Fargo analysts report.

The main thing they point to is the danger for US public debt, which has already gone beyond even all the unimaginable limits. This has made relevant discussions in the US about the likelihood of default in the summer or early autumn if lawmakers do not agree to raise the debt ceiling. This can potentially lead to a catastrophic downgrade of the US credit rating and cause the dollar to rise as investors begin to sell off their US assets and move money into safer currencies. "This will certainly undermine the dollar's role as a reserve currency that is used in transactions around the world. And many Americans will lose their jobs. And, of course, their borrowing costs will rise," the US Treasury Secretary Janet Yellen told CNN in January.

Manat is stable anyway

What about the Azerbaijani manat amid the forecasts on the US currency? According to Azerbaijan's Minister of Finance, Samir Sharifov, the manat exchange rate can strengthen sharply due to the large amounts of foreign currency earnings. This can have a number of negative consequences. "The strengthening of the manat may create problems, especially for our exporting companies," Sharifov said.

However, the Governor of the Central Bank of Azerbaijan, Taleh Kazimov, has repeatedly said that this year the CBA would also try to continue its policy of stable exchange rate. "The state budget for the next year is based on the exchange rate of manat to the US dollar equal to ₼1.7. Stability of the exchange rate is important for macroeconomic stability," Kazimov said.

Meanwhile, member of parliament, Vugar Bayramov, believes that the reaction to global processes, especially regional changes, is possible throughout the year. "The main economic factors affecting the exchange rate of the manat are the volume of currency coming into the country, as well as the amount of currency sold at auctions held by the State Oil Fund (SOFAZ). SOFAZ provides a significant portion of the demand for currency. The amount of auctioned money is very important to meet the demand for dollars and in terms of the manat's exchange rate, given that our foreign partners also consider the exchange rate of their national currencies as one of the economic factors. Azerbaijan has not yet introduced an exchange rate regime. The Central Bank still has the right to directly intervene in the process. Therefore, changes in the exchange rate of the manat this year will directly depend on the position of the Central Bank," Bayramov said.

According to Sergei Drozdov, chairman of the Moscow Exchange, keeping the exchange rate stable for a long time requires a strong economy and budget. "Apparently, this is the case in Azerbaijan. The country is not so big, it continues to export energy resources and is doing well. It is more profitable for the people of Azerbaijan to live with a stable exchange rate for manat than with a volatile one," Drozdov said in his interview with local media.

The issue of mutual settlements in foreign trade transactions in national currencies has been on the agenda of interstate negotiations in Azerbaijan for several years. In particular, such discussions have been held with Turkey and Russia. Moreover, this year the Moscow Exchange plans to start trading in Azerbaijani manat.

However, all these proposals and projects still remain at the level of discussions and negotiations only. It is too early to talk about the imminent end of the dollar's hegemony in trade settlements. It is better to focus on the prospects of its global exchange rate policy.