© Reuters. FILE PHOTO: US dollar banknotes are shown in this illustration taken on March 10, 2023. REUTERS/Dado Rović/Illustration/File photo
Written by Naomi Rovnik and Libby George
LONDON (Reuters) – Rivalry with China, fallout from Russia’s war in Ukraine and debate once again in Washington over the United States’ debt ceiling have put the dollar, the world’s dominant currency, under new scrutiny.
Russia’s denials, imposed by sanctions on global financial systems last year, have also fueled speculation that allies outside the United States will divert their resources away from the dollar.
Here are some arguments for why de-dollarization might happen – or perhaps why it doesn’t.
Sliding case reserve
The dollar’s share of official foreign exchange reserves fell to a 20-year low of 58% in the fourth quarter of 2022, according to IMF data.
Stephen Jane, CEO of Eurizon SLJ Capital Limited, said this shift was most pronounced when adjusted for the exchange rate.
“What happened in 2022 was a very sharp decline in the share of the dollar in real terms,” Jin said, adding that this was a reaction to the freezing of half of Russia’s $640 billion in gold and foreign exchange reserves after its invasion of Ukraine in 2022. This has led to Countries like Saudi Arabia, China, India and Turkey rethink diversification into other currencies.
Take a longer look
The dollar’s share of central banks’ foreign reserves in the last quarter of 2022 reached its lowest level in two decades, but the move was gradual and is now at about the same level as in 1995.
Central banks put rainy day money in dollars in case they need to support exchange rates during economic crises. If the currency weakens severely against the dollar, oil and other commodities traded in the greenback become very expensive, raising the cost of living and fueling inflation.
Many currencies, from the Hong Kong dollar to the Balboa of Panama, have been pegged against the dollar for similar reasons.
waning grip on commodities
The Great Dollar was restricted to commodity trade, allowing Washington to impede market access for producing countries from Russia to Venezuela and Iran.
But trade is shifting. India buys Russian oil in UAE dirhams and UAE rubles. China turned to the yuan to buy $88 billion worth of Russian oil, coal and minerals. China’s national oil company CNOOC (NYSE:) and France’s TotalEnergies completed the first yuan-settled LNG trade in March.
After Russia, countries are asking, “What if I get on the wrong side of sanctions?” BNY Mellon (NYSE) strategist Jeffrey Yu.
The yuan’s share of global over-the-counter forex transactions has risen from almost nothing 15 years ago to 7%, according to the Bank for International Settlements (BIS).
But it is a very complex system
De-dollarization would require a vast and complex network of exporters, importers, currency dealers, debt issuers and lenders to decide independently to use other currencies. unlikely.
The dollar makes up one side of nearly 90% of global forex transactions, accounting for about $6.6 trillion in 2022, according to Bank for International Settlements data.
About half of all foreign debt is in dollars, the Bank for International Settlements said, and half of world trade is accounted for in dollars.
Barry Eichengreen, a professor of economics and political science at Berkeley, said the dollar’s functions are “mutually reinforcing.”
“There is no mechanism to get banks, companies and governments to change their behavior at the same time.”
Fragmented future
While there may not be a single successor to the dollar, the proliferation of alternatives could create a multipolar world.
UBNY Mellon said countries were realizing that one or two dominant reserve asset groups were “not diversified enough”.
Global central banks look at a variety of assets, including corporate debt and tangible assets like real estate and other currencies.
“This is an ongoing process,” said Mark Tinker, managing director of Toscafund Hong Kong. “The dollar will be used less in the global system.”
Unshakable foundation
Since large bank deposits are not always insured, companies use government bonds as a cash alternative. Thus, the dollar’s position is supported by the $23 trillion US treasury market – seen as a safe haven for money.
“The depth, liquidity, and security of the Treasury market is a big reason why the dollar is a leading reserve currency,” said Brad Setser, a fellow at the Council on Foreign Relations who tracks cross-border currency flows.
International holdings of Treasuries are massive and there is no reliable alternative yet. The German bond market is relatively small, at just over $2 trillion.
Commodity producers may agree to trade with China in yuan, but recycling cash into Chinese government bonds remains difficult due to account opening difficulties and regulatory uncertainty.
“But you can hop on an app and trade Treasuries from anywhere,” said Galvin Shea, emerging markets analyst at Natwest Markets.
($1 = 6.9121 renminbi)
