In the millennia that humans have roamed the earth, the world has cycled through a number of obscure, even unusual, currencies. The ancient Mayans are believed to have used chocolate as money; traders in the Solomon Islands favored dolphin teeth. Yap islanders, at least those with strong backs, tended toward massive stones. The British pound, the oldest global currency still used today, anchored the global economy, until its fall in the early, mid, and late 20th century.
Today, it is the dollar that reigns supreme. The world’s biggest economy (probably) can print greenbacks at will. The dollar is the world’s most widely held reserve currency and also dominates global trade. Oil, no matter how many times Saudi Arabia and China hold their breath, is still priced in the dollar. Most other major commodities are, too. As is pretty much everything else.
Yet talk of de-dollarization is in the air. Fueled by fears of U.S. sanctions, Russia and China appear to be ramping up efforts, yet again, to use the renminbi (RMB) in trade with partners, while BRICS countries are weighing a new common currency as yet another alternative.
“Every night I ask myself why all countries have to base their trade on the dollar,” Brazilian President Luiz Inácio Lula da Silva lamented last month. “Who was it that decided that the dollar was the currency after the disappearance of the gold standard?”
First of all, gold bugs, dollar dominance came first. And second, don’t believe the hype about the demise of the dollar.
Wait, back up. What even is de-dollarization?
De-dollarization refers to a country’s effort to become less dependent on the dollar, whether by using another currency to settle cross-border trade or diversifying reserves away from the dollar by turning to gold, the Chinese yuan, or bitcoin. It doesn’t necessarily mean that the greenback has become less vital for that country’s economy—or that its reign is over. (Especially when the U.S. Federal Reserve’s decisions on interest rates mark the tune that nearly every other country dances to.)
“To me, de-dollarization just means a government’s ability to reduce its dependence or reliance on the dollar,” said Daniel McDowell, a professor of political science at Syracuse University. “I think the key thing here is to try to distinguish or separate the concept of de-dollarization from the end of dollar dominance. I don’t think those two things have to go together.”
What’s with all of the hype now?
Much of the current attention is driven by Russia, which has ramped up its use of the yuan to cope with sweeping Western sanctions. After the Kremlin invaded Ukraine in February 2022, the G-7 hit back with a spate of punishing economic measures. That strangled the Russian economy—and forced Moscow to rapidly seek alternatives to both the dollar and euro.
“There’s no doubt that the Russians have been forced to de-dollarize and also de-euroize their trade,” said Brad Setser, a former senior advisor to the U.S. trade representative during the Biden administration, now at the Council on Foreign Relations. “There is evidence that Russia in particular is making greater use of the yuan, and it’s also clear that the Chinese and others are looking for opportunities to expand the use of the yuan in trade settlement.”
China’s recent efforts have only added fuel to the fire. As part of China’s bid to internationalize its currency, a number of countries beyond Russia—including Saudi Arabia, Bangladesh, India, Argentina, Brazil, Pakistan, Iraq, and Bolivia—have recently either traded in the yuan or expressed their willingness to do so in the future. They are spinning their tires: Cross-border transactions denominated in RMB are still a tiny fraction of business done in the dollar or the euro.
Why are they so desperate to diversify away from the dollar?
As Western nations levy harsh sanctions against Moscow, Beijing is worried that it could be next. Given the current fraught geopolitical climate, China hopes that reducing its reliance on the dollar will help act as a buffer against the threat of U.S. sanctions.
“I don’t think that any Chinese economists believe that they can actually supplant the dollar globally,” said Gerard DiPippo, a senior fellow at the Center for Strategic and International Studies. “Their goals are more modest. It’s about mitigating Chinese banks’ sanctions exposure, which is very hard to do.”
It’s not just the threat of sanctions that’s prompting these moves, either. For some countries, it’s out of necessity; they have to turn to the yuan, or other forms of currency, when they are unable to access dollars. Argentina, for instance, announced that it would use the yuan to purchase Chinese goods as it grapples with shrinking dollar reserves.
Countries that are economically dependent on China may also be attempting to curry favor with Beijing, which has been encouraging the internationalization of the yuan. “It could just be about trying to signal to China that we’re on your team and we want to help you there,” McDowell said. “So some of it’s political and symbolic.”
Is this new?
No, this has been underway for years. China’s efforts to internationalize the yuan date back to at least the 2008 global financial crisis, when American banks stopped lending and Beijing was left in the lurch. Ever since, China has worked to build up its resilience and expand the use of the yuan in trade, including by striking a spate of bilateral currency swap deals and establishing the Cross-Border Interbank Payment System (CIPS).
“It’s really nothing new,” said Zongyuan Zoe Liu, a fellow for international political economy at the Council on Foreign Relations and FP columnist. “It’s not that China has just recently been doing it, or they just suddenly decided this is a good idea. They have been doing this for a while.”
But China and Washington don’t get along. What has given impetus to the latest push is broader dissatisfaction with America’s economic stewardship, starting with a spray-and-pray approach to economic sanctions and ending, or just beginning, with the current debt ceiling crisis.
“Geopolitical concerns have become a bigger driver of the push in interest in internationalizing the currency,” McDowell said. “I think Chinese policymakers are concerned about being sort of facing similar kinds of financial pressures that Russia has faced at some point in the future.”
Can these efforts threaten the dollar’s dominance?
Not anytime soon. Even though the yuan has been increasingly used in international payments for bilateral trade, the “actual share is tiny” in comparison to the dollar, said Paola Subacchi, a professor at Queen Mary, University of London.
For both trade financing and reserves, China’s long-standing efforts to expand the use of the yuan have failed to make much of a dent. In March, the dollar accounted for 41.7 percent of global payments—just slightly eclipsing the yuan’s share of 2.4 percent, according to data from the Society for Worldwide Interbank Financial Telecommunication. Similarly, last year, 58 percent of the world’s foreign exchange reserves were held in dollars, compared to just 2.7 percent in Chinese yuan. It’s hard to replace the dollar when one doesn’t allow free convertibility, which severely limits the yuan’s international appeal.
“The numbers are still showing that the dollar is still the dominant currency,” Subacchi said.
Beijing will keep trying, and keep failing. The yuan’s not convertible, the government controls capital flows, and even its value is manipulated by Beijing. You can’t do business with IOUs, but you can always do business with a bushel of greenbacks.
“I think there will be incremental moves to make greater use of the yuan to denominate China’s trade with commodity-exporting countries,” Setser said. “And then I think China will discover that it is difficult to fully go much further and to really radically change the structure of how it settles its trade, because it still wants to sell to the U.S., still wants to sell to Europe. Its economy doesn’t balance without significant exports.”
