Last week French global banking giant BNP Paribas (BNP) settled with U.S. authorities in a case which they were convicted of committing large-scale violations of U.S. economic sanctions. BNP’s guilty plea cost them $8.9 billion in fines along with a temporary ban on dollar-clearing transactions.
The ruling has brought to the forefront the issues that arise with the dollar’s monopoly over international transactions. According to U.S. law, banks are subject to U.S. economic sanctions in any processing of U.S. dollar transactions, even if the operations include non-U.S. branches.
In the wake of the ruling, French Finance Minister Michel Sapin has called out this dollar dominance and is looking for change in international markets. BNP, which was guilty of having monetary transactions with U.S. embargoed countries such as Cuba and Iran, was subject to U.S. regulations because of its use of the dollar. However, the ruling left French officials grumbling, as they claim that the transactions had nothing to do with the U.S.
Sapin told the Financial Times that, “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.”
Sapin argues that there must be an increase in the euro’s presence in international transaction markets in order to allow global businesses to avoid currency exchange risks.
“The euro zone must think about the role it is giving to its common currency – and mobilise itself to bolster the usage of the euro as an international exchange currency,” said Sapin.
Unfortunately for Sapin and French officials, the reality of the international market is that there is no real alternative to the stability of the dollar. Its dominance over global transactions is daunting for anyone looking for change. More than half of all cross-border loans and deposits are in US dollars. According to the Bank for International Settlements, the dollar is on one side of 87% of all the trades in the more than $5 trillion a day foreign exchange market (up from 84.9% in the previous survey). The dollar remains the benchmark price for oil and most commodities. When investors want to hedge their exposures, they use a dollar-denominated derivative market instrument.
According to Marc Chandler, global head of currency strategy at Brown Brothers Harriman, “When the euro was first launched, many argued… that this was the first alternative to the dollar and business and investors would jump at the opportunity. They really haven’t.”
With the underwhelming effort by the euro to take a more dominant position in global commerce, there are few other alternatives to the dollar. China’s yuan remains inscrutable while Russia’s ruble remains volatile. Both are not suitable to be widely used outside of their respective countries.