Israel’s Role In Weakening The Dollar

Since Russia’s military campaign in Ukraine began on February 24, the US and its Western allies have imposed a slew of sanctions in an attempt to penalize Moscow for its conduct and cripple its economy. But they might have an unexpected ally in Israel’s, as it is also playing a major role in weakening the dollar.

Israel’s central bank has introduced the Chinese yuan to its reserves, which totaled more than $200 billion last year. This is the first time in a decade that Israel has made alterations to its reserve currencies, which had previously been held in US dollars, euros, and British pounds.

In addition to yuan, the reserve also included Canadian, Australian, and Japanese currency commencing in 2022.

Dr. Alex Coman, an economics expert at Tel Aviv University, said Israel’s action is not surprising, particularly considering that Israel is apparently close to establishing a free trade agreement with China by the end of 2022.

According to reports in the Israeli press, most Chinese items will be exempt from customs duties in bi-lateral commerce, while others will enjoy considerable duty reductions.

“If this agreement ends up being signed, Israel could become a pipeline through which the Chinese products will be streaming,” said Coman.

“And if this happens, the yuan will definitely get more significant because the Chinese currency will be used in part of the trade between the two states, so Israel is already preparing itself for such a scenario,” he added.

However, the central bank’s choice to adopt the yuan may not have been driven solely by economic considerations; various international publications, including Bloomberg’s, suggest that geopolitics had a role in Israel’s choice.

Since Russia’s military campaign in Ukraine began on February 24, the US and its Western allies have imposed a slew of sanctions in an attempt to penalize Moscow for its conduct and cripple its economy.

As a result of these efforts, Russia began alienating the US dollar, saying in March that nations antagonistic to Moscow would be permitted to only buy gas from Russia in Russian rubles. It has also begun discussions with significant partners such as India, China, and Iran on the viability of trading in local currencies with them. It has also prompted other states to take similar steps.

These actions have undermined the US dollar, which is likely why Israel opted to make an unusual move and diversify its national currency stockpile by switching away from the US dollar.

US Won’t Like the Move

Coman says he has no delusions that Israel’s decision will be met with hostility by Washington officials. He doubts, however, that they will take any measures to penalize or compel the Jewish state to rescind its decision.

“Of course, they will frown because they feel that they have invested in us dramatically. But the question is whether there will be anything beyond that frustration. I highly doubt it.”

Another Israeli analyst, Amir Oren, a specialist in international relations, has raised doubts about potential US meddling in Israel’s central bank decision.

“It is in the American interest to keep the Israeli economy stable,” he said. “And if the central bank believes that what can contribute to that stability is the Chinese yuan, why would Washington interfere?” he reasoned.

Israel, on the other hand, has had occasions when the US has spied on its transactions with China. One such incident occurred in 2000, when then-Prime Minister Ehud Barak, under American pressure, canceled an agreement that would have provided Beijing with multiple Phalcon airborne early-warning radar systems.

Another happened in 2019, when the Israeli city of Haifa struck a 25-year agreement with China to allow the Chinese to invest in its port. Officials in Washington were outraged, and they threatened Israel with dire consequences if it ventured to “take sides” in the grand game between two giants. The Jewish state crumbled under the stress, and while the project continued, Chinese involvement was restricted.

The equivalent pressure, according to the Israeli expert, will not be directed to the choice to incorporate the yuan in Israel’s national reserves.

One reason, according to Coman, is that Washington recognizes that “Israel is a tiny player,” while the second is that the yuan is yet unable to replace the dollar as the world’s leading currency.

“At this stage, it is better for China to have its currency devalued because it makes its products cheaper. So I would not rush to celebrate the yuan. Nor would I bury the dollar,” concluded Coman.