Could Israel lead to the unraveling of the dollar as the world’s reserve currency?
According to a report by the Jerusalem Post, the Bank of Israel — the nation’s central bank — added four new currencies to its holdings earlier this month. This move is a first-time development in Israeli history. Of the currencies included in the Bank of Israel’s holdings, was the Chinese yuan, or renminbi.
Per a Bloomberg report, the central bank has plans of lowering its US dollar and euro holdings in efforts to diversify its foreign reserves.
Last year, Israel’s foreign currency reserves stood north of $200 billion — another first. Its foreign currency reserves have usually been made of dollars, euros, and British pounds. The Israeli central bank’s holdings will now feature Canadian dollars, Australian dollars, Japanese yen and the Chinese renminbi.
Bank of Israel Deputy Governor Andrew Abir said that this move represents a change in Israel’s “whole investment guidelines and philosophy.”
Abir added that the increase in Israel’s foreign exchange reserves compelled the central bank to entertain “the need to earn a return on the reserves that will cover the costs of liability.”
In 2020, the central bank held 67.4% of its foreign exchange in US dollars. 30.1% in euros and 2.5% in British pounds. According to these new plans, both the yen and the pound will now make up 5% of the central bank’s holdings.
The yuan will make up 2% of its holding. On top of that, the Australian and Canadian dollars will both make up 3.5% of its holdings.
In response to this addition of new currencies, US dollar holdings will go down from 66.5% in 2021 to 61% in the present, while euro holdings will fall from 30.8% to 20%.
Following the sanctions mania that various Western nations have carried out against Russia after it invaded Ukraine, various countries have become worried about the risks that come with a dollar reserve currency standard. This has led to speculation about the world economy going through a “de-dollarization” phase, in which the yuan and other competing currencies could grow in international prominence.
The irony of this development is that Israel has been one of the US’s key allies. Israel’s relationship with China is rather interesting.
Israel and China established formal diplomatic ties in 1992. Controversially, Israel has a track record of selling US military secrets to China.
On the economic front, Israel joined the Asian Infrastructure Investment Bank, an institution that China dominates, in 2015. The US was annoyed by Israel’s decision to do so at the time.
As time went by, other policymakers have caught wind of Israel’s troubling ties with China. During the Trump administration former Secretary of State Mike Pompeo visited Israel to pressure the government of then-Prime Minister Benjamin Netanyahu to discuss China’s growing presence in the Jewish state. This meeting seemed to have had an effect, as Israel did not join Chinese technology giant Huawei’s 5G network tender.
As far as trade goes, China is Israel’s largest trading partner after the United States.When it comes to Israelis’ views on China, 66% of Israelis view the East Asian nation favorably.
If American influence wanes as the country becomes more socio-economically unstable, Israel will likely start hedging more and bolstering ties with China on trade and potential military fronts. For example, former director of Mossad Yossi Cohen, said back in the summer of 2021, “I do not understand what the Americans want from China. If anyone understands it, he should explain it to me. . . . China is not opposed to us and is not our enemy.”
With multipolarity starting to become the new way of international affairs, Israel will be confronted with some tough decisions as it tries to navigate unpredictable geopolitical waters.
One of these decisions could end up being forging stronger ties with China and downgrading its otherwise strong ties with the US.