THE US dollar plays a vital role in the US economy owing to the fact that it accounts for more than 80% of international trade finance. It also constitutes 60% of the world’s foreign exchange reserves and dominates the bond and currency markets.
However, the widespread use of the US dollar hinders other countries’ (particularly emerging markets) access to international capital. For instance, Russia currently faces financial sanctions and frozen foreign exchange reserves while Brazil’s president has expressed dissatisfaction with the use of the US dollar.
As the greenback is also not favoured by many Asian economies, ASEAN finance ministers and central bank governors are exploring ways to reduce their dependence on the US dollar by shifting towards local currencies. Here is how Prime Minister Datuk Seri Anwar Ibrahim commented on this matter in April 2023:
“There is no reason to continue to depend on the US dollar. In our negotiations between Malaysia and Indonesia, we use ringgit and rupiah. The central bank has also proposed to bring this method to trade matters. The more important issue concerns the Asian Monetary Fund (AMF) which has been well received in Asia – I think this proposal should be discussed.”
Malaysia has demonstrated the fastest economic growth rate in Asia over the last two decades, making it worthwhile to listen to the man behind this growth.
China also aims to make its yuan the world’s reserve currency and an alternative to the US dollar. Using the yuan in ASEAN countries could be a solution. However, strict control of the exchange rate by the Chinese authorities makes it challenging to promote the use of yuan there.
Another major world currency, the euro, will never match the level of liquidity of the US dollar in Asian countries.
The proposed AMF could enable countries in the region to pool their currencies, thus paving the way for a move away from the International Monetary Fund (IMF) and the US dollar in times of crisis. Several governments, including Japan, Malaysia, Thailand, Indonesia and the Philippines have already signed bilateral agreements using only their national currencies.
“The cohesive actions of Asian states will help enhance Malaysia’s intra-trade relations within the region which will positively affect the liquidity of the ringgit, hence making it more accessible,” opined OctaFX financial market analyst Kar Yong Ang.
As China accelerates de-dollarisation worldwide, billions of dollars of liquidity remain unclaimed, leading to the strengthening of alternative currencies, especially Asian ones. – May 10, 2023
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