There is much to discuss during President Trump’s visit to Qatar, the UAE and Saudi Arabia next week.
Oil and gas, investment into the US and tariffs, technology transfers and nuclear power, weapons sales and security guarantees, Yemen and Iran are all likely to feature. By way of welcome, Qatar has said that it will buy a fleet of Boeings. Let us hope they arrive before the decade is out.
But there is one heavyweight subject that is likely to be further down the agenda: payments. Nothing infuriates members of the Global South, including Mr Trump’s hosts next week, and power players such as Russia and China, more than dependence on the US dollar.
The threat of exclusion from the dollar payments system – the greenback still forms about 60 percent of global reserves – brings formidable powers to Washington. Giants such as HSBC, sovereign wealth funds like Adia, Mubadala and the QIA, and fourth-tier banks in India, all quail at the prospect of being forced out of the dollar universe.
This is centred on the Swift messaging platform, a cooperative based in Belgium overseen by the central banks of the G10 and access to US clearing houses known as CCPs. Swift and the CCPs are the mechanisms that the US can – and does – deploy to enforce sanctions against Iran, for example.
And if there is anything that enrages the members of the Global South even more than dollar dependency, it has been their inability to fashion an alternative.
In January Trump warned off Brics members – Iran, the UAE and Egypt are already in the bloc while Saudi Arabia is considering its options – from seeking to replace the dollar and threatened transgressors with swingeing tariffs.
“We are going to require a commitment from these seemingly hostile Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs,” Trump wrote on Truth Social with some overuse of the caps lock button.
Yet things are changing. Observers point out that following “Liberation Day” last month, the dollar fell relative to other currencies in tandem with the fall of the S&P 500 and narrowing bond yields. That does not normally happen and can mean only one thing: that foreigners were shunning the US currency.
Equally, sceptics, such as those found in financial markets, know that the alternatives have their problems. This is the famous dance of the least ugly.
The Chinese RMB, for example, is not fully convertible – despite CCP apologists telling us that it will be for about a decade. Despite the evidence of our eyes in places like Vancouver and Macao there are in theory capital controls in the People’s Republic and there are two rates for yuan: the CNY at home and the CNH out of Hong Kong for foreigners. Guess which one offers better rates.
However, Beijing has set up its Cips payments network – the Cross-border Interbank Payment System. HSBC, the world’s largest trade finance bank, and Standard Chartered have said they are joining. Watch this space.
The euro has been the great hope of the chattering classes, but has so far disappointed on the downside, representing only about a fifth of global reserves. Why? Because Angela Merkel’s famed “Swabian housewife” does not want the Bundesbank to underwrite the lifestyle of the Greek shipowner for whom paying taxes is an affront.
That may be changing – both the attitude of the Greek shipowner and the Swabian housewife – but for the moment and for the most part the issue of euro-denominated debt is an EU member state competence. This means that European markets remain fragmented and shallow by comparison with the US.
This is one of the bets that the Trump administration is making. They will say that Americans did not ask to be the world’s reserve currency, others have chosen it. Supporters will further argue that widespread use of the dollar has served to inflate the currency’s value against others and thereby harmed US exporters contributing to a current account deficit with implications for the fiscal deficit and the alarming US debt pile.
Where does this leave Saudi Arabia, the UAE and Qatar? Caught in the middle is the short answer, like many other countries. They would like to transact more in other currencies but cannot find anything to compete with the depth, convenience and reliability of the dollar. Moreover, for us here in the Arabian Gulf currencies are pegged to the US currency. And many of us like it that way.
The only thing that can be said with confidence is that alternatives will be explored with more urgency – be it the euro, RMB swap lines, Bitcoin, stablecoins, gold-backed transactions or blockchain-backed crypto. But for the moment the dollar is king.
