![]() ![]() Most importantly though, a replacement for the RMB would introduce foreign exchange risk to the Saudis, who currently maintain a peg to the USD. In addition, China’s commodity futures markets are much less developed than those in the US, with average bid/ask spreads much higher than those of New York, Chicago, or London, creating much higher transaction costs for market participants. On its own, China may be the largest importer of oil, but China’s share of global oil consumption (13.0%) lagged behind the US (20.2%) and even the European Union’s (13.5%). It is still important to note that China does not stand alone in global oil markets. With China’s status as the world’s largest oil importer since 2016 and the recent launch of yuan-denominated futures in Shanghai, it may seem likely that this is a reasonably plausible long-term outcome. Smith also noted “despite this, the demise of centrality could happen precipitously- one thing to watch for would be the willingness of major commodity producers to, as a group, price and accept payment in non-USD.” Former Treasury Senior Official Adam Smith, emphasized that “though the USD is being challenged at the margins as yuan clearing and other localized trading processes pick up steam, its central role in global finance is currently unrivaled.”Īdditionally, former Senior Treasury Sanctions official and nonresident Senior Fellow at the Atlantic Council Brian O’Toole noted that “while sanctions overuse may drive other countries to set up mechanisms free of US influence, any erosion of the USD global role depends on much larger economic factors, like liquidity and velocity, than any overuse of a US policy tool."Īs the United States considers its options with respect to the Khashoggi case, the Saudis in response to US pressure could in the long term move away from USD pricing and embrace another currency, specifically the RMB, as a mechanism for denominating its oil exports. Some observers are more concerned about the RMB (Chinese Yuan) than the Euro. One necessary condition for a currency to be a global reserve currency is the political stability of the currency’s sponsor, which is not present in the EU at this time. Most close observers are not worried about the Euro overtaking the USD. The use of sanctions has been a tremendous tool and there are certainly reasons why overuse of sanctions is problematic, but speeding up the decline of the USD as the global reserve currency is not a major concern. In fact, USD’s role as the global reserve currency is most affected by commercial and economic forces, not by politics. ![]() It is most effective as public messaging to the Iranians that Europe is trying to resist American pressure.” ![]() sanctions, reputational damage, or Iranian misuse. William Rich, of the Council on Foreign Relations and a former Treasury diplomat in the United Arab Emirates, however, argues that the proposed Europe-Iran payment mechanism is “impractical because such a process would be inefficient and costly and could not guarantee European firms protection from U.S. Some argue that if Iran shifted to Euro-denominated transactions, it could spark a broader shift within energy exporting countries that would eventually weaken the USD as the reserve currency as well as undermine the impact of future unilateral U.S. Under the surface of discussions of alternative payment mechanisms is the legitimate question of the negative impacts of American coercive economic statecraft on the USD status as the leading global reserve currency. Dollar (USD) in the international economic order. The European Union’s announcement in September 2018 that it would begin to create a special payments channel with Iran in response to the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA) once again raises the question of the role of the U.S. ![]()
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