From SCDigest's On-Target e-Magazine
- July 7, 2014 -
Supply Chain News: As Numerous Countries Act to Take Down the Dollar, What Could Impact be on Procurement?
Import Prices will Rise, as Expert Says Change Could Happen in as Little as Five Years
SDigest Editorial Staff
The on the US dollar, now going on for several years, appears to once again be gaining steam, with news from several countries over the past seeking to end dollar dominance in global finance.
In the end, that could make it more expensive for US companies to source goods overseas.
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Procurement managers need to be aware of these developments that could have a big impact on the procurement landscape, perhaps as the well-known Bove says, in as little as 10 years. |
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What Do You Say?
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On June 10th, Sergey Glaziev, an economic advisor to Russia's Vladimir Putin, published an article outlining the need to establish an international alliance of countries willing to get rid of the dollar in international trade and refrain from using dollars in their currency reserves.
That was before talks set to take place soon between Russia and China looking for a way to trade with each other in ruples and the yuan, the currencies of Russia and China respectively. Talks are also going on with other members of the so-called BRIC countries - which also include India and Brazil - to end the reign of the US dollar as the world's reserve currency.
Glaziev also said that "We are discussing with China and our BRIC partners the establishment of a system of multilateral swaps that will allow us to transfer resources to one or another country, if needed. A part of the currency reserves can be directed to [the new system]."
Meanwhile, South Korea and China announced this week that they intend to do trade with each other in their respective currencies, a program planned to be in place by the end of the year.
A few days earlier, the French Central bank also signed a memorandum of understanding with China to establish a yuan payment system in Paris.
"This MoU is the first step towards the creation of a renminbi clearing and settlement infrastructure in Paris," Banque de France said in a statement.
Just today, France also lashed out at US dollar dominance.
We [Europeans] are selling to ourselves in dollars, for instance when we sell planes. Is that necessary? I don't think so. I think a rebalancing is possible and necessary, not just regarding the euro, but also for the big currencies of the emerging countries, which account for more and more of global trade," Michel Sapin, the French finance minister, said at a conference over the weekend.
Today almost two-thirds of the world's foreign currency reserves are held in dollar assets, mostly Treasury bonds. Nearly half the foreign debt securities in the world are in dollars, as are more than half the world's cross-border loans and deposits. Oil is priced in US dollars across the world, and most international financial transactions are done in US dollars.
What this does is keep demand for dollars high, giving the US a relative advantage in the value of its currency versus those of other nations, what the French in the past have called America's "exorbitant privilege."
(Sourcing and Procurement Article Continues Below)
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In fact, it is the dollar's status as reserve currency that really allows the US to run such huge budget deficits. Countries across the world need to acquire US debt to build their dollar reserves, meaning the US can continue borrowing money in the trillions of dollars at for now still low interest rates.
 A change is not going to happen overnight, but as the events in recent years and weeks attest, there are strong forces at work to end the dollar's dominance. Some say it is inevitable, as even the US cannot produce enough currency to meet global demand as BRIC and other developing countries rapidly expand.
But even in the short term, the dollar could start to lose value versus other currencies - though of late the dollar has been mostly rallying. However, when compared to its peers, the dollar has drifted to a 15-year low, according to the International Monetary Fund, indicating that more countries are willing to use other currencies to do business.
Procurement managers need to consider this drift in both long term sourcing strategies and in short term decisions, as the dollar could lose still more value if the move away from the greenback gains real momentum, exposing the buying company to exchange rate risk. Import prices overall will rise at a faster pace, as companies overseas have to price higher to make up for getting paid in less valuable dollars.
"Generally speaking, it is not believed by the vast majority that the American dollar will be overthrown," Dick Bove, vice president of equity research at Rafferty Capital Markets, said in a recent note to clients. "But it will be, and this defrocking may occur in as short a period as five to 10 years."
Procurement managers need to be aware of these developments that could have a big impact on the procurement landscape, perhaps as the well-known Bove says, in as little as 10 years.
Do you see the dollar losing its place as the world's reserve currency? What will be the impact? Let us know your thoughts at the Feedback section below.
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