View from Delhi: The US dollar’s dominance is no longer guaranteed

Pic.: Brookings

In great royal style, last Sunday, Riyadh simply let the 50-year-old petrodollar agreement between the US and Saudi Arabia to expire. To recap, the term “petrodollar” refers to the US dollar’s pivotal role as the currency used for crude oil transactions on the world market per the US-Saudi deal dating back to 1974 shortly after the US went off the gold standard, notes M.K. Bhadrakumar, Indian Ambassador and prominent international observer.

In the history of global finance, few agreements have wielded as many benefits as the petrodollar pact did for the US economy. At its core, the agreement stipulated that Saudi Arabia would price its oil exports exclusively in US dollars and invest its surplus oil revenues in US Treasury bonds — and, in a quid pro quo, the US would provide military support and protection to the kingdom. 

The ‘win-win’ deal ensured that the US gained a stable source of oil and a captive market for its debt, while Saudi Arabia secured its economic and overall security. In turn, the denomination of oil in dollar elevated the dollar’s status as the world’s ‘reserve currency’.

Since then, the global demand for dollars to purchase oil has helped to keep the currency strong, not only made imports relatively cheap for American consumers but in systemic terms, the influx of foreign capital into US Treasury bonds supported low interest rates and a robust bond market.

Suffice to say, the expiration of the 1974 US-Saudi ‘oil-for-security’ deal has far-reaching implications.

Crucially, the petrodollar’s expiration could weaken the US dollar and, by extension, the US financial markets. If oil were to be priced in a currency other than the dollar, it could lead to a decline in global demand for the greenback, which, in turn, could result in higher inflation, higher interest rates, and a weaker bond market in the US.

Suffice to say, going forward we may expect a significant shift in global power dynamics with the growing influence of emerging economies, the changing energy landscape and a tectonic shift in the global financial order as it enters a “post-American” era. The bottom line is that the US dollar’s dominance is no longer guaranteed.

There is no question that Saudi Arabia has a roadmap worked out. Four days before the expiration of the oil-for-security deal, Reuters reported that Saudi Arabia has joined a China-dominated central bank digital currency cross-border trial, “in what could be another step towards less of the world’s oil trade being done in U.S. dollars.”

The announcement on June 4 came from the Switzerland-based Bank for International Settlements [BIS], an international financial institution owned by member central banks. It means that Saudi  central bank has become a “full participant” of Project mBridge, a collaboration launched in 2021 between the central banks of China, Hong Kong, Thailand and the United Arab Emirates.

Indeed, other big emerging economies, including India, Brazil and Russia, also plan to launch digital currencies in the next 1-2 years while the European Central Bank has begun work on a digital euro pilot ahead of a possible launch in 2028.

Now, add to this Russia’s master plan to create a new BRICS payments system bypassing the dollar altogether. Moscow stock exchange announced on Wednesday that it will stop trading dollars and euros from Thursday, June 13. 

Thus, the expiration of the US-Saudi deal last weekend is emblematic of a cascading challenge from various quarters to the dollar’s pre-eminence as ‘reserve currency.’ In particular, the end is nearing for the unfettered freedom America enjoyed to print dollar currency at will and living it up far beyond its means and imposing the US’ global hegemony.

There is growing unease among US elites that good life may be ending as the crushing debt burden sinks the American economy. In a CNBC interview yesterday, Treasury Secretary Janet Yellen warned that high interest rates are also adding to the burden as the US manages its massive $34.7 trillion debt load.

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