The Taliban take over rule in Afghanistan.. What is its impact on the US currency?

The processes taking place in the global financial system, in particular the strengthening of the role of the euro and the yuan, have already begun to undermine the dominant role of the US currency, and in general, the current situation in Afghanistan threatens to become a catalyst for de-dollarization processes, which was revealed by the former British Finance Minister, Jim O'Neill In an article published in the "Project Syndicate" newspaper.

O'Neill draws attention to the fact that the dollar has managed to withstand strong shocks more than once, and these crises include the fall of Saigon in 1975 and the failure of the United States in Iraq after the 2003 invasion, however, the situation is still different, as most countries do not want to volatility Their currencies are against the dollar, and countries that had economic weight to influence the global monetary system such as Japan, Germany and China have deliberately decided not to do so.

For its part, China has long refused to expand the presence of the renminbi in financial markets, both domestically and internationally, in turn, the United States has done its best to keep the current system in place.

In an article published by the Russian newspaper Izvestia, the writer, Oksana Belkina, stated that the seizure of power in Afghanistan by the Taliban threatens the stability of the dollar, according to the warnings of a former employee of one of the leading American investment banks.

Is the dollar declining?

The decline in the role of the dollar is evident in the data on foreign exchange reserves of global central banks. In 2018, according to the European Central Bank, the share of the US currency in international reserves recorded its lowest level in the past two decades, reaching 61.7%.

Moreover, in 2020, this ratio fell to less than 60% for the first time since 1995, mainly due to the policies of the US monetary authorities, as in the midst of the epidemic, the Federal Reserve system issued an order to pump more dollars into the affected economy, which led to weaken the US currency.

In contrast, JPMorgan Chase experts warned that the dollar risks losing its status as the global reserve currency in the near future, and in fact, the dollar has gained its current privileged position thanks to the strength of the US economy.

However, the main engine of economic growth is shifting towards Asia, and accordingly China has quadrupled its share in the global GDP in 70 years, to reach the equivalent of 20%.

O'Neill believes that the International Monetary Fund will work for 5 years to review the composition and evaluation of the Special Drawing Right, and if the yuan's share increases, as a result of the review, this means that the global monetary system will inevitably develop.

In the same context, the process of declining the role of the dollar has continued since the beginning of the 21st century, first as the only currency, then as the most important reserve currency.

In this regard, Mikhail Korolyuk, Head of Investment Management and Analytical Support at Solid International Finance Corporation, believes that this process is likely to continue for decades until the dollar is converted into the role of one of the reserve currencies.

The decline in the dollar's role is reflected in the data on foreign exchange reserves of global central banks (Reuters)

tarnished reputation

The author wondered whether the current situation in Afghanistan would speed up the pace of this process?

Indeed, the Taliban's victory does not have direct economic consequences for the US currency, especially since Afghanistan's impact on the global economy is minimal.

For his part, the expert at Purcell, Mikhail Nikitin, believes that US involvement in another large-scale and costly war is the only possible scenario for the dollar's "collapse".

Nikitin adds that "Joe Biden has always been a supporter of the withdrawal of troops from Afghanistan. We are more than a year away from the next congressional elections and more than 3 years to the next presidential election, so in the absence of any force majeure, the dollar will witness an increase and decrease, and the Taliban will have no income in that".

The writer quotes financial analyst Mikhail Bespalov that “the situation that has developed in Afghanistan poses some risks to the reputation of the United States. However, it is unlikely to have a significant impact on the exchange rate of the American currency, and the fact is that the dollar, just like other “protective currencies” Including the Swiss franc, they are assets that rise in value as risks grow in the world.”

According to Korolyuk, revealing the limits of US power could significantly accelerate the process of undermining the dominant position of the US currency, while Western experts argue that the rapid collapse of the current Afghan government raises questions about the position of the United States in the eyes of both its allies and opponents.

Huge arsenal

On the other hand, Afghanistan's 40 million people control a huge arsenal, as the Taliban - after the Americans left - confiscated a range of weapons and military equipment provided by the United States to the Afghan government, from M16 rifles to armored Humvees, worth billions of dollars .

In turn, Semyon Tenyaev, president of the Westpac Group, says that “this could lead to the outbreak of domestic conflicts, primarily with Iran itself. As a result, the sharp rise in energy prices could clearly hit the dollar, as it hardens the economy.” The American is on his way to the “Green Miracle.” Afghanistan is called the graveyard of empires, so a seemingly innocuous departure for Americans could be another stray bullet fired at the Middle East.

The head of the Russian-Asian Federation of Industrialists and Businessmen, Vitaly Mankevich, believes that the Taliban's access to power can indirectly affect the exchange rate of the US currency, moreover, the effect can be ambiguous, for example, the expansion of the fighting may lead to Central Asia Or India to slow economic growth and hit commodity prices, which, paradoxically, will increase the dollar index.

Mankevich adds that the withdrawal of the US army may lead - on the other hand - to a decrease in the share of US dollar settlements in the region and the transition to settlements in national currencies, especially the yuan, which will negatively affect the US currency.