De-dollarisation: why are countries looking to ditch US currency?

Move away from USD has accelerated following invasion of Ukraine

The US dollar’s global share of forex reserves has fallen significantly in recent years
The US dollar’s global share of forex reserves has fallen significantly in recent years
(Image credit: Illustrated/Getty Images)

The long reign of the US dollar as the world’s reserve currency may be drawing to a close as non-Western and emerging economies look for alternatives to the greenback.

The US dollar (USD) has been “king in global trade for decades”, said CNBC, “not just because the US is the world’s largest economy, but also because oil, a key commodity needed by all economies big and small, is priced in the greenback”.

Most other commodities are priced and traded in US dollars too, and it remains the dominant force in global foreign exchange reserves, accounting for 58.36% of forex holdings worldwide in the fourth quarter of 2022, according to International Monetary Fund (IMF) data. But the dollar’s share in central banks’ foreign exchange reserves has dropped from more than 70% in 1999, the UN agency reported.

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And analysts report that the “de-dollarisation” process has been turbo-charged by Russia’s invasion of Ukraine and the economic reaction from the US and Europe.

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What did the papers say?

The freezing of Russia’s foreign exchange reserves – believed to be worth around $300bn – in the wake of the invasion was “significant”, said UnHerd’s Thomas Fazi. The move “violated an almost sacred principle: the neutrality of international reserves”.

With this decision, wrote Wolfgang Münchau for EuroIntelligence, “we have done all of the following: undermined trust in the US dollar as the world’s main reserve currency; forestalled any challenge the euro might ever make; reduced the creditworthiness of our central banks; encouraged China and Russia to bypass the Western financial infrastructure; and turned bitcoin into a respectable alternative transaction currency”.

De-dollarisation was clearly “not something that would happen overnight”, added UnHerd’s Fazi, “but the wheels of history were set in motion”. Most of the world’s nations didn’t join the West in “slapping sanctions on Russia”, but instead “quietly started strengthening their ties with Russia and China in an effort to reduce their dependence on the dollar-centric system”.

The movement is now “gathering global momentum”, said Markets Insider. Nations “from Asia to Europe and Latin America” are “lining up plans to end the greenback's dominance of global trade and investment flows”.

A Reuters analysis of official data from China found that the yuan overtook its US counterpart in March as the most used currency for Chinese cross-border transactions. At the same time, Beijing is steadily reducing its holdings of US Treasury securities.

According to Bloomberg, the yuan has also replaced the US dollar as the most traded currency in Russia.

And China and Brazil have made a deal to settle trade in each other’s currencies. Brazil’s President Lula da Silva even went so far as to say during a recent trip to Shanghai that “every night I ask myself why all countries have to base their trade on the dollar”.

What next?

At a meeting in March, finance ministers and central bank governors from the Association of Southeast Asian Nations (ASEAN) also discussed whether to reduce dependence on foreign currencies including the US dollar.

Days later, the Times of India reported that India and Malaysia were starting to settle their trade in the Indian rupee.

Saudi Arabia has also signalled that it is open to trade in currencies other than the dollar. “There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is the euro, whether it is the Saudi riyal,” The kingdom’s finance minister, Mohammed al-Jadaan, told Bloomberg TV in January at the World Economic Forum (WEF) in Davos, Switzerland.

Yet “despite the slow erosion of its hegemony, analysts say the US dollar is not expected be dethroned in the near future – simply because there aren’t any alternatives right now”, said CNBC.

“The most common argument against the idea that the dollar will lose its leadership role is that there is no credible alternative,” agreed economist Maria Demertzis, a senior fellow at the Brussels-based Bruegel think tank. However, she wrote, central bank digital currencies (CBDCs), which are currently in some phase of development in 114 countries, “can facilitate this transition away from the dollar, as they promise to be a revolution in cross-border (wholesale) payments”.

Zimbabwe is set to launch a digital currency next week, when the country’s central bank will issue “tokens” that are “backed by gold reserves and can be transferred between people and businesses as a form of payment”, AP News reported. Brazil is also actively exploring how to construct a digital currency for cross-border payments.

A growing number of American economists and lawmakers are arguing that the US should follow suit or risk being left behind.

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Former Morgan Stanley economist Stephen Jen told Markets Insider that the general de-dollarisation trend “will likely continue, but probably not to a point where a non-dollar currency commands a bigger market share than the dollar”.

“More likely,” he concluded, “we will evolve from a unipolar reserve currency world to a multipolar world”, mirroring the wider geopolitical realignment that is under way.

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