US dollar era may come to an end: US continues politization of its currency

Baku, Azerbaijan, Apr. 6

By Umid Niayesh - Trend:

The US government is breaking the cardinal rule of preserving the credibility of its currency by continuously politicizing the dollar, and imposing unilateral sanctions, said Mehrdad Emadi, consultant at the U.K.-based Betamatrix International Consultancy.

There where some rumors that the US Treasury Department is going to give Iran limited access to US dollars as part of the post-nuclear deal sanctions relief through offshore dollar clearing houses so American banks would not be involved. Meanwhile the US government announced that it is not planning to allow Iran access to the US financial system or use of the US dollar for transactions.

The United States' insistence on keeping Iran out the dollar-based and/or dollar-denominated transactions will not only prevent any meaningful trade between Iran and the American companies but it will also cause secondary harm to both sides, Emadi told Trend, commenting on the issue.

To Iran, this means that local firms will not be able to acquire technologically advanced goods and capital equipment where the U.S. has had superior know-how, Emadi said, adding this effectively pushes Iranian firms toward the second best available technology increasing the cost of knowledge leapfrogging for Iran.

Furthermore, unavailability of access to advance American know-how may result in other sources seeking a premium from Iran to make similar technology available to its businesses, according to the expert.

"All of these will slow down the catching up phase of Iranian economy in strategically important technologies," Emadi said.

However, the losses may be significant to the American side as well, he believes.

"In terms of global trade, US firms are under rising competitive pressure from their competitions from other advanced economies to increase or even maintain their market share in high-mark up technologies," he said, adding that finding new clients and entering new markets have never been so crucial for the US firms since the American economy is under tremendous financial pressure to improve its chronic trade deficit that had made the American economy the most indebted country in the world.

"By banning Iranian firms and the country from using its currency, the US government, in my view, may be providing added impetus for certain economies who seek to reduce their dependency on dollar in their foreign trade."

"I will go further and suggest that by continuously politicizing the dollar, American government is breaking the cardinal rule of preserving the credibility of its currency as the world's most usable and available tool in global trade, that the currency is the global transaction vehicle and as such should not be used as a tool to deliver threats to other governments, at least not so openly," Emadi underlined.

Historically, foreign investors have preferred the US dollar because the American government encouraged everyone outside the US to use dollar in their foreign transactions by allowing only market forces to determine the value of the dollar, he said.

Then, there were no restrictions on the dollar holding and using of the dollar in foreign trade by other countries, Emadi explained, adding that this made the US dollar attractive as a reserve currency.

"The acceptance of the dollar as the global currency has meant that outside world has been willing to accept and buy the US dollar as its foreign reserve currency because it has been globally accepted in transactions and there has rarely been a concern by foreigners about using their dollar reserves in their foreign trade," he said.

Therefore, a big part of the demand for dollar outside America has been to have it as a reserve because it has been considered a safe haven currency, Emadi said.

"This willingness of the world to purchase dollar and keep it in reserve has meant that when the US government has increased the supply of dollar or as we say, printed more dollars, the value of dollar did not fall as it would have, because the outside world was willing to buy it and keep it in their reserve accounts," he said.

To pay for the trade deficit when for decades America has been importing more than its could sell abroad, the gap or the deficit was simply paid for by printing more dollars and paying Japanese, Chinese, OPEC members, Emadi explained.

"If other economies print more money, the value of their currency falls because like any other commodity if the supply of an item rises while the demand has stayed the same, to sell the item the price has to fall. Dollar has not faced this constraint because the world has accepted it to keep it as their reserve because it has been safe and without restrictions on use."

"Once other countries start questioning their freedom to use their dollar reserves because the US government starts putting restrictions on some countries and their dollar reserves, then there is risk of holding the US currency as a reserve," said Emadi, adding that the dollar has been used as a political tool against some countries.

"Hence dollar can no longer be considered as the unrestricted, market driven global currency," he said.

When that happens, the era of being able to print more dollars without fearing it will depreciate like other currencies will be over, Emadi said.

"And then like other economies, the US economy will have to face the discipline of currency markets like other nations, the expert explained, adding if it runs into a deficit, it either has to finance it through higher taxes, or less public expenditure instead of paying for it by printing dollars without fearing for its depreciation.

"The trade deficit also can no longer be easily financed by just printing more money and paying the foreign nations in dollars," Emadi said.

He added that it may not be the efforts of Russia, Iran, China, Brazil or some Arab countries who wish to see the dawn of the dollar era but the tendency of Washington to use unilateral sanctions one time too many that may trigger for the replacement of the US dollar, be it gradually but assuredly, Emadi said.

"This may be a new chapter in the world economy which will have painful financial disciplinary implications for a government who had printed its way out of twin, or triple deficits because the world has been prepared to hold its currency. Because it was apolitical and most of the times, a safe haven. It seems neither may be true soon," he added.

Follow the author on Twitter: @UmidNiayesh

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