Since the beginning of 2023, numerous events related to reducing dependence on the US dollar have occurred. Examples include Russia and Iran jointly introducing cryptocurrencies for international trade, Saudi Arabia allowing the sale of oil in currencies other than the US dollar, Argentina and Brazil planning to establish common currencies, and Brazil and China agreeing to avoid using the US dollar as an intermediary currency.
The term "de-dollarisation" has gained significant attention, particularly with the increasing globalization of the Chinese renminbi. There are two primary short-term factors driving the acceleration of de-dollarisation.
Firstly, the conflict between Russia and Ukraine has led to financial sanctions imposed on Russia by the United States since February 2022. The imposition of these sanctions, along with criticism from various organizations and public figures such as the International Monetary Fund, has undermined confidence in the dollar and the euro in many parts of Europe.
Secondly, the US fiscal deficit and national debt have contributed to concerns. The US fiscal deficit reached 15 percent of GDP in 2020 due to the COVID-19 pandemic. Additionally, the national debt has increased from $10 trillion in 2008 to $31.4 trillion, creating doubts about the long-term stability of the dollar.
De-dollarisation also involves adjustments to investment portfolios by global investors. If confidence in the dollar weakens, investors naturally reduce their holdings of financial assets denominated in US dollars.
There are two long-term factors influencing de-dollarisation. Firstly, the share of the US in global GDP and foreign trade has declined significantly. After World War II, the US accounted for 56 percent of global GDP, but by 2020, it had decreased to 24 percent. Similarly, the US share of global trade fell from 32 percent to less than 10 percent. This decline has opened opportunities for other currencies to compete for greater roles on the global stage, weakening the dollar's position.
Secondly, the rise of other currencies has also played a role. Unlike the post-World War II era when the US dollar and British pound were the dominant global currencies, there are now more currencies competing for significant positions, including the euro and other nontraditional reserve currencies. This further undermines the dollar's position.
De-dollarisation is a long-term process with three major reasons for its continuation. Firstly, there have been more declarations about de-dollarisation than actual actions. Most statements express a willingness to explore alternative settlement currencies, but trade still predominantly relies on the US dollar. However, increased use of other currencies for settlement and reserves can help nations diversify and reduce risks associated with excessive dependence on the US dollar.
Secondly, the role of the dollar in the global monetary system has historically been volatile. Its dominance has fluctuated over time, and its share of the global reserve monetary system has ranged from zero to as high as 84 percent. Currently, it stands at 58.4 percent, but the recent de-dollarisation trend does not guarantee a permanent change. The share of the dollar could rebound in the future.
Thirdly, despite the decline in the dollar's status as a reserve currency, it still maintains a significant advantage over other currencies. The US dollar accounts for 88 percent of global foreign exchange transactions, and its offshore dollar market has grown from $7.8 trillion to $8.3 trillion in recent years. The US economy remains strong, especially its well-developed financial market, which gives it an edge in terms of economic scale, liquidity, and credibility.
The current international reserve system, established at the Bretton Woods Conference in 1944, revolves around the US dollar. Although the system collapsed in 1973, the dollar's dominant position as an international reserve currency remained largely unchanged due to the highly developed and open financial markets in the US. However, this dollar-centric system is inherently unstable and unfair, as demonstrated by the "Triffin Dilemma" and the more recent "New Triffin Dilemma." The US monetary policy's spillover effects and the impact on global financial stability have created challenges for the rest of the world.
China aims to build a diversified reserve system, with the internationalization of the renminbi (RMB) playing a crucial role. To achieve this, China should ensure sustained and stable economic growth through reforms and opening-up, enhance its comprehensive strength, reform the domestic financial market, deepen financial market opening-up, and accelerate the development of the treasury bond and foreign exchange derivatives markets. China can also facilitate the two-way opening of financial accounts and improve the market-oriented reform of the exchange rate system to enhance the flexibility of the RMB exchange rate.
Source:
De-dollarisation picks up pace amid bigger yuan role. (2023, June 12). The Star. https://www.thestar.com.my/business/business-news/2023/06/12/de-dollarisation-picks-up-pace-amid-bigger-yuan-role
China expands de-dollarization push as global central banks use record amount of yuan. (n.d.). Markets Insider. https://markets.businessinsider.com/news/currencies/china-de-dollarization-dollar-dominance-global-central-banks-currency-yuan-2023-5
