US dollar's dominance putting businesses at risk

The dominance of a single currency is raising trade risks but there is no good alternative to it right now. 

Use of home currency in certain trade transactions with selected countries may help reduce transaction costs and risk, said the speakers at the roundtable discussion "Using US Dollar in Foreign Trade: Is There any Alternative Option?" held at the Bangladesh Institute of Bank Management (BIBM).

The US dollar is the world's foremost reserve currency held by most of the central banks and other institutions, Bangladesh Bank's Deputy Governor SM Moniruzzaman said, adding that the extensive use of the dollar for meeting internal needs and economic transactions is making its global presence visible.

In the first quarter of 2019, the dollar makes up 61% of all known central banks' foreign exchange reserves, said Moniruzzaman.

Almost 40% of the world's debt is issued in dollars, he said, adding that foreign banks need a lot of dollars to conduct transactions.

The evolution of foreign exchange market in Bangladesh is closely linked with the exchange rate regime of the country, said the deputy governor, adding that the exchange rate of the newly created currency Taka was fixed to the British pound sterling, after independence.

The replacement of pound sterling with the dollar as the intervention currency in 1983 marked a big shift, said Moniruzzaman, elaborating that around 89 percent of import transactions were conducted in the dollar in 2019 which around 85 percent in the last decade. 

Around 98 percent of 2019's export transactions were conducted in the dollar which was around 97 percent in the last decade.

The Bangladesh Bank has allowed the authorized dealers to do trade services in freely convertible foreign currencies. 

While presenting his paper, Dr Shah Mohammad Ahsan Habib of the BIBM said the major reasons behind the dollar's global dominance are its worldwide acceptance, size of the US economy and the confidence in it.

Extensive use, fluctuations in the dollar and macroeconomic policies of the US have major implications for global exports and imports, said Ahsan, adding that a weaker dollar makes US exports more competitive, a stronger dollar makes borrowing costs higher.

More importantly, the effect of macroeconomic policy decisions in the US or elsewhere may have a negative effect beyond the control of a developing economy, Ahsan said, explaining that quantitative easing affected China's holdings of dollar-denominated debt negatively.

Following the neighbouring countries, it is secure for Bangladesh to trade through a dollar, said the BIBM's Supernumerary Professor Yasin Ali, adding that if there are any options to make a profit through any other currency "we may apply."

Direct trade exchange with other countries is very difficult without a dollar, the central bank's Deputy General Manager Anisur Rahman said. 

"We had to wait for one and a half years to open an account with China," said Anisur, adding that the agreement paper was completely written in Chinese. They did not allow us to translate the paper in English either."

Under this kind of condition, it is very difficult to use local currencies even how bigger the country's economy is, maintained Anisur.