As the government has been devising plans to keep the dollar dominant, China has been making its own moves to increase global influence of the renminbi.
The summit between President Trump and China’s top leader, Xi Jinping, in Beijing this week is likely to include tense discussions about tariffs, Taiwan, Iran and sanctions. But simmering below the surface is another battle between the United States and China: an intensifying currency war.
Concerns about America’s mounting debt load and its aggressive use of sanctions to cut adversaries off from the Western financial system have raised doubts about the safety of the dollar as the world’s reserve currency. Those fears have led to growing demand for gold and increasing numbers of oil transactions using cryptocurrencies or China’s currency, the renminbi. An erosion of the dollar’s dominance would be a problem for the U.S. economy, but in recent weeks America has been taking steps to shore up the currency’s pre-eminence.
At the heart of that strategy has been discussions between the Trump administration and several nations in the Gulf and Asia about the possibility of the United States offering currency “swap” lines. The agreements, which could be run through either the Treasury Department or the Federal Reserve, would essentially ensure that American allies have sufficient supplies of U.S. dollars, reducing the need for them to conduct business with renminbi or other currencies.
With a currency swap, the United States purchases another country’s currency, giving that country more dollars for handling oil sales transactions.
The Federal Reserve generally administers swap lines, which historically have been created to ease market pressures during periods of global financial turmoil that could threaten the U.S. economy.
“Currency swap arrangements have become a tool with both symbolic and strategic significance in the contest for currency dominance and geopolitical influence,” said Eswar Prasad, a Cornell University professor and a former head of the China division at the International Monetary Fund. “The Trump administration’s eagerness to extend currency swap lines to U.S. allies in the Gulf is clearly intended to protect those countries from the fallout of the war in Iran while also sidelining China from playing a major role in the region.”
