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De-dollarization: Local currency settlement and its constraints
The Fed is still trusted by global investors compared with the European Central Bank and People’s Bank of China when giving policy direction to create public perceptions.
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Greenbacks: An employee counts United States dollar banknotes at Ayu Masagung money changer in Kwitang, Central Jakarta, on March 19, 2020.
(JP/Wendra Ajistyatama)
T
he influence of the United States as the generator of global multilateralism is decreasing, while China's influence is increasing, especially in the aspect of international trade. Amid the US-China geopolitical influence battle that will continue, it is expected that ASEAN, including Indonesia, will gain opportunities in trade and investment given geopolitical neutrality and geographic proximity.
In the height of global uncertainty, investors' concerns are focused on efforts by central banks to maintain inflation and currency stability and their impact on the response of the central bank’s rate going forward. Other issues that have surfaced include the impact of the downward trend in commodity prices and downstreaming policies on GDP prospects and the current account, as well as the impact of twist operations on foreign capital inflows. Investors also continue to monitor geopolitical risks and the sustainability of structural reforms including fiscal reforms linked to the 2024 elections.
This protracted global imbalance contains several problems. First, dependence on the US dollar has caused the global development model to depend on cheap funds resulting from quantitative easing and higher debt levels. Second, the fundamental problem in the international monetary system, if the US ends the balance of payments deficit, the international community will lose its largest additional source of reserves. This dilemma often causes the Fed's monetary policy to be less effective for the US and global economy.
Third, for a developing country like Indonesia, which has a current account deficit due to large investment needs, the dollar hegemony leads to dependence on increasingly volatile foreign capital flows. Currently, the US dollar still has relatively strong fundamentals compared with its closest competitors, the euro and the yen. The European Union and Japan are energy importers whose currencies tend to come under pressure if energy prices increase.
Meanwhile, the US is relatively independent due to the abundant production of offshore oil fields. Plus energy prices are denominated in the US dollar causing an increase in energy prices that will also cause an increase in demand for this currency.
Next, the US government securities market is still unbeatable. Investors around the world are recorded as holding securities worth a total of US$24 trillion, far exceeding those of Japan and China, which are dominated by domestic investors. This sufficient securities market creates a highly efficient financial system and is a risk-free reference in the global financial system. This has also caused the US dollar to become the currency of choice for foreign debt settlement and is often the main currency for foreign exchange reserves in most countries.
Moreover, the Fed is still quite trusted by global investors compared with the European Central Bank and People’s Bank of China when giving policy direction to create public perceptions. If the role of the US dollar is taken over by another currency, for example the Chinese renminbi, this will have three important consequences.
