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Recently, “de-dollarisation” has become a hot topic. The so-called “de-dollarisation” of the world revolves around three main aspects: (1) the currency of international trade settlement, (2) the currency of investment and (3) reserve currency. The main initiatives can be broadly classified into three areas.
First, Brazil and ASEAN have started to consider settling trade in local currency. Iraq said it would allow trade with China to be settled in Renminbi. Saudi Arabia said it was open to using currencies other than the US dollar for trade settlement. Second, the share of foreign investors’ holdings in US Treasuries has declined from the peak of 43% during the 2008 financial crisis to 23.6% by the end of March 2023. Third, central banks start to diversify their reserve asset allocation to achieve “de-dollarisation.” Data show that the US dollar’s share of global central bank foreign exchange reserves fell from 71% in 1999 to 58% by the end of 2022.
It is noteworthy that the consideration and action of “de-dollarisation” have emerged in a number of bilateral and multilateral cooperation initiatives in which China is involved. For China, as the issue of “de-dollarisation” is closely linked to the internationalisation of the Renminbi, China’s participation in “de-dollarisation” has been given special significance in the context of the current intensified geopolitical game between China and the US. For example, among the BRICS countries, the issue of “de-dollarisation” is increasingly being discussed, with Brazilian President Lula, who was in China recently, asking why the US dollar must be used in international trade. It is completely possible for the BRICS countries to use local currencies for settlement. In the case of China and Russia, they have already started to “de-dollarise” their trade by using the local currency for settlement.
On the geopolitical front, the US confiscated the Afgan central bank’s US dollar assets held in the US and took it upon itself to allocate them. After the break out of the war in Ukraine, the US imposed severe sanctions on Russia, not only freezing assets but also removing Russian banks from the SWIFT payment system. On the economic front, after the US Federal Reserve’s unlimited QE, domestic inflation in the US is going high and the purchasing power of the US dollar is declining. In response to inflation, the Fed has aggressively raised interest rates, and the Silicon Valley Bank collapse in March is still fresh in our memories. The possibility of an economic recession or even an economic crisis cannot be ruled out in the future in the US. Under such expectations, some countries prudently adjust their dollar reserves. Nevertheless, in the long term, the hegemonic position of the US dollar may be weakened, but its dominant position will remain.
Firstly, the fundamental pattern of US dollar hegemony is unlikely to change in the near future. Although the US dollar is beginning to show signs of diminishing status and influence in the global market, it is still the world’s dominant “world currency” and will remain so for a considerable period of time. Even if some countries do not use the US dollar in their international trade activities in the future, this will not fundamentally shake the US dollar’s international status. Secondly, the status of the US dollar is a matter of US hegemony in general and the US will do anything to protect it. The US dollar is the most important (financial) “product” produced by the US and exported to the world. It is also the central instrument through which the US governs the global economy and financial markets. In the history of the US, the country has not hesitated to wage several wars to destabilise the challenge currency in order to maintain the international status of the US dollar. Third, the market remains relatively risky for non-US dollar transactions with other countries. Countries that are currently willing to settle in local currency, e.g. Russia, Brazil, and the Middle East, etc, have weaker combined economic strengths and tend to have more volatile domestic economies.
Recommended Readings:
Calls to move away from the US dollar are growing– but the greenback is still king via CNBC by Penny Chen
What De-Dollarization? The Dollar Rules the World via Bloomberg by Tyler Cowen
De-dollarization has begun via American Institute for Economic Research by Peter C. Earle
