Criticism of US Dollar Hegemony Getting Louder

The performance of the US dollar constitutes a central determining factor for the development of the oil price. The criticism of the US dollar hegemony is getting louder on a daily basis. The Chinese rating agency Dagong Global Credit has recently downgraded the rating of the United States to AA. According to Dagong the quantitative easing has sustainably eroded the legitimacy of the US dollar as global reserve currency . The agency saw the USA as lacking in willingness to pay off its debt and accused it of being ignorant vis-à-vis its creditors.

The following graph illustrates the fact that the US dollar index (a basket of currencies consisting of the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish crown, and the Swiss franc) is still locked in a long-term downward trend. The index has recently broken through the threshold of 80 points, which now has turned into a massive resistance. The dollar index has been caught in a secular bear market since July 2001 and has lost almost 40% since then. Therefore the dollar creditors' efforts to diversify come as no surprise.

US dollar index since 1983

Sources: Bloomberg, Erste Group Research

Generally speaking, the criticism of the US dollar has become rather substantial on a global scale, as substantiated by numerous examples:

• In October "The Independent" reported that China, Russia, Brazil, Japan, and a number of Gulf States were planning to stop settling oil transactions in US dollar by 2018. The dollar should be replaced by a basket of currencies including the Chinese yuan, the Japanese yen, the Russian rouble, the euro, gold, and other commodities. The political implications of such a decision would be enormous.
• The Iranian oil exchange accepts settlement in many currencies except US dollar.
• Nine countries in Central and South America and the Caribbean have recently agreed on setting up a monetary union.
• Turkey wants to invoice international transactions with Russia, Iran, and China in local currency. On top of that, Russia will allow the settlement of transactions with China in yuan and rouble.
• Four Gulf nations (Saudi Arabia, Kuwait, Bahrain, Qatar) have agreed to establish a monetary union. In the long term plans are to introduce a physical currency, the "gulfo", and an own central bank is supposed to be set up. Within the region, oil contracts are not settled in dollar anymore. The GDP of the area amounts to USD 1.2 trillion, and it holds 40% of global oil reserves.

By. Ronald Stoeferle of Erste Group

Erste Group is the leading financial provider in the Eastern EU. More than 50,000 employees serve 17.4 million clients in 3,200 branches in 8 countries (Austria, Czech Republic, Slovakia, Romania, Hungary, Croatia, Serbia, Ukraine). As of 31 December 2010 Erste Group has reached EUR 205.9 billion in total assets, a net profit of EUR 1,015.4 million and cost-income-ratio of 48.9%.