In recent years, the financial world has increasingly been marked by discussions surrounding “de-dollarization.” This term denotes the strategic efforts by various nations to diminish their reliance on the US dollar for international trade and financial transactions. With rising geopolitical tensions and the emergence of alternative economic blocs, understanding the implications and realities of de-dollarization is paramount for professional traders and investors.
This article explores the rise of de-dollarization, its impacts on currency and commodity markets, and potential future scenarios.
Drivers of De-dollarization
Although it is not new, de-dollarization has gained momentum due to several geopolitical and economic factors. Historically, the US dollar’s dominance started with the Bretton Woods Agreement in 1944, which established the dollar as the primary reserve currency of the world, backed by gold. Despite the system collapsing in the early 1970s, the dollar kept its dominance because of the stability and size of the US economy, its geopolitical influence, and the extensive market for US debt.
One of the primary motivations behind de-dollarization is the geopolitical leverage that the United States wields through its control of the global financial system. The US has frequently used economic sanctions as a tool of foreign policy, targeting countries like Russia, Iran, and Venezuela. These sanctions are facilitated by the dollar’s dominance in international finance, which forces targeted nations to seek ways to minimize their exposure to the US financial system. The freezing of Russia’s foreign exchange reserves, valued at approximately $300 billion, following its invasion of Ukraine further underscores the risks associated with dollar dependence.
Emerging economies and regional powers are exploring ways to strengthen their currencies and financial systems. The BRICS nations, which include Brazil, Russia, India, China, and South Africa, have been discussing a new reserve currency to reduce their reliance on the dollar. In July 2023, Bolivia joined Brazil and Argentina in using the Chinese to pay for imports and exports. Additionally, by March 2024, 52.9% of China’s international settlements were conducted in renminbi, a significant increase from less than 1% in 2010.
Brazil and Argentina are at the forefront of de-dollarization in Latin America. They are discussing the creation of a common currency for bilateral trade to reduce reliance on the US dollar. Brazil’s trade with other BRICS nations increased dramatically, from $48 billion in 2009 to $178 billion in 2022, showing a 370% growth.
In Southeast Asia, ASEAN countries are making significant strides towards de-dollarization. Indonesia, Malaysia, Singapore, the Philippines, and Thailand have agreed to develop a cross-border digital payment system to facilitate local currency trade. As of 2024, Indonesian President Joko Widodo has urged using locally issued credit cards to avoid foreign payment systems, furthering efforts to protect against geopolitical disruptions. Malaysia is advancing its de-dollarization agenda by proposing the creation of an Asian Monetary Fund. In 2024, Malaysia’s central bank is developing mechanisms to enable trade with China using the Malaysian ringgit instead of the US dollar.
Several African nations, including Egypt, Ethiopia, and South Africa, actively engage in de-dollarization through their involvement with the BRICS bloc. The BRICS New Development Bank (NDB) is issuing loans in local currencies to help member nations avoid the risks associated with dollar-denominated financing. As of 2024, the BRICS countries collectively account for around 24% of the global GDP and 16% of global trade. The NDB aims to provide 30% of its loans in local currencies, promoting economic stability among developing nations.
Another example of a gradual shift towards regional currencies in bilateral trade is the recent agreement between India and the United Arab Emirates to use the Indian rupee for non-oil commodity trading, moving away from the dollar. the shift.
De-dollarization is spreading across the globe as more nations adopt local currencies for international trade, diminishing the US dollar’s hegemony. Driven by geopolitical maneuvers and economic strategies to reduce dollar dependency, this shift is reshaping international finance. Despite these shifts, however, there are doubts whether these trends will have a decisive impact on dollar dominance. Let’s examine how this move towards de-dollarization impacts the USD’s role in the global economy.
Current State of Dedollarization
As of 2024, the de-dollarization trend is progressively evident in various global economic patterns, though the US dollar retains a robust position in the international financial system. Despite a diversifying landscape, the dollar still accounts for about 69% of global currency usage and approximately 60% of disclosed foreign currency reserves worldwide.
World – Allocated Reserves by Currency for 2023Q4, Source: IMF
De-dollarization profoundly affects the global economic landscape, significantly impacting currency and commodity markets. For instance, the share of the US dollar in global foreign exchange reserves has decreased to a historic low of 58%, a notable drop from 61% in 2022. This trend is driven by central banks diversifying their reserves into other currencies and assets, like the euro, which has increased its share to 21%. Furthermore, gold reserves have grown substantially, with central banks purchasing more gold in 2023 than in any previous year since records began in 1950, making up around 4.9% of China’s foreign reserves.
Regarding currency transactions, the US dollar continues to dominate, accounting for 88% of daily transactions. However, the Chinese renminbi’s (RMB) share has been growing steadily, reaching 7% of global currency transactions in early 2024, up from less than 1% a decade ago. This increase is supported by China’s efforts to internationalize the RMB by establishing global clearing centers and numerous currency swap agreements. Additionally, countries are increasingly conducting bilateral trade in their local currencies to reduce dependence on the US dollar. For example, Brazil and Argentina now trade with China using the RMB, and as of March 2024, 52.9% of China’s international settlements were conducted in RMB, surpassing the dollar for the first time. Russia has also significantly increased its use of the yuan for oil and other commodity transactions, with 65% of its trade with China now settled in yuan.
De-dollarization is influencing financial markets and investment strategies globally. A shift away from the dollar poses risks to US financial assets. Analysts from Morgan Stanley warn that de-dollarization could lead to a depreciation of US stocks, which the dollar’s strength and liquidity have supported. A weaker dollar could increase import prices and inflation, potentially undermining investor confidence. On the other hand, de-dollarization could alleviate the burden of dollar-denominated debt for emerging markets. Countries like Turkey and Argentina, which have faced economic crises due partly to their dollar liabilities, could benefit from reduced dollar dependence.
The impacts of de-dollarization are also evident in commodity markets, particularly in the trading of oil and gold! Oil
The petrodollar system, initiated in 1974, effectively ended in June 2024. This system was a pivotal economic arrangement that mandated the sale of oil in US dollars, thus entrenching the dollar as the dominant global reserve currency. For decades, this setup facilitated a substantial demand for the dollar because countries had to convert their local currencies into dollars to buy oil, the world’s most traded commodity.
The agreement’s termination means that oil-exporting countries are no longer obligated to conduct their transactions in US dollars. Saudi Arabia, for example, has shifted to pricing and selling its oil in Saudi riyals. This move will cascade global oil trade dynamics, influencing other nations’ currency reserves and trading practices. India and China, two of the largest oil importers, need to hold higher reserves of Saudi riyals to maintain their energy supplies.
This shift could significantly reduce the global demand for the US dollar in oil transactions, which previously accounted for an estimated $1.7 trillion annually or about 20% of all US dollar-denominated trade worldwide. Gold
Amidst a notable de-dollarization trend, central banks globally are increasingly purchasing gold to diversify away from the US dollar, driven by geopolitical tensions and the desire to mitigate financial risks. In 2022, central banks acquired a record 1,136 metric tons of gold, and in the first half of 2023 alone, they added 387 metric tons to their reserves, with China leading these purchases as part of its strategy to minimize reliance on the dollar. This movement towards gold is also bolstered by concerns over potential asset freezes, prompting 41% of surveyed central banks and sovereign funds to anticipate increasing their gold holdings in the coming years. Analysts predict that gold prices could range from $3,000 per troy ounce by the end of 2024, reflecting ongoing economic uncertainties and sustained demand from central banks.
Is De-dollarization a Reality?
The debate over de-dollarization often oscillates between viewing it as an imminent reality or dismissing it as a persistent myth. Based on the latest data and expert analysis as of June 2024, here are several potential scenarios and possibilities regarding the future of de-dollarization.
Scenario 1: Gradual Decline of Dollar Dominance
The most likely scenario is a gradual decline in the US dollar’s dominance rather than a sudden collapse.
● Steady Diversification: Central banks worldwide continue diversifying their reserves away from the US dollar. The dollar’s share of global reserves has fallen from 59% in 2021 to 58% in 2023. This decline indicates a steady shift towards other currencies, such as the euro, which now holds 21% of reserves, and the yuan.
● Increased Use of Other Currencies: The renminbi’s role in global finance gradually increases. China’s international settlements in RMB have surpassed those in USD for the first time, with 52.9% of transactions settled in RMB as of March 2024, compared to 42.8% in USD. Additionally, bilateral trade agreements bypassing the dollar are becoming more common, such as the agreements between Brazil and China.
Scenario 2: Sudden Geopolitical Shifts
A more dramatic scenario involves sudden geopolitical events that could accelerate de-dollarization.
● Geopolitical Tensions: Significant geopolitical events, such as escalated tensions between the US and major global players like China and Russia, could hasten de-dollarization efforts. For instance, the ongoing Russia-Ukraine conflict has increased the use of non-dollar currencies for Russian trade, particularly with China. Over the past year, most of China’s oil imports from Russia have been denominated in yuan.
● Sanctions and Economic Policies: The US use of financial sanctions has driven some countries to seek alternatives to the dollar to mitigate the risk of economic isolation. Russia’s move to eliminate the US dollar from its National Wealth Fund is a case in point, reducing its vulnerability to Western sanctions.
Scenario 3: Technological Transformation
Technological advancements, particularly the rise of digital currencies, could significantly impact the pace and extent of de-dollarization.
● Central Bank Digital Currencies (CBDCs): Developing and adopting CBDCs could provide viable alternatives to the dollar for international transactions. China’s digital yuan is a leading example, already being used in cross-border transactions and potentially reducing reliance on the dollar. By June 2024, nearly 100 CBDCs were globally in research or development stages, with some already used for cross-border transactions
● Blockchain and Fintech Innovations: Implementing technologies like blockchain could facilitate more efficient and secure international trade without needing a dominant reserve currency. The BRICS Pay initiative aims to streamline transactions among BRICS countries using blockchain, an example of such innovation. Developed in 2018, this platform will enhance real-time transactions between member countries.
Is De-dollarization a Myth?
Despite the trends towards de-dollarization, many experts believe the US dollar will retain its dominant position for the foreseeable future. The dollar’s enduring trust and liquidity are key factors in this. It remains the most trusted and liquid currency worldwide, accounting for approximately 69% of global currency usage, with the euro at 23%. It is also the preferred currency for international debt issuance and cross-border loans, making up about 60% of disclosed foreign currency reserves.
The dollar’s entrenched global trade and finance position provides a robust foundation. For example, 88% of all over-the-counter foreign exchange transactions involve the US dollar. Despite a gradual decline, the dollar’s share in global export invoicing remains high.
Alternatives like the euro and the renminbi face significant challenges. Despite its growth, the renminbi accounts for only 2.3% of global payments via SWIFT and 7% of global currency transactions. Other potential contenders lack the geopolitical and economic stability required for a currency to be a dominant reserve.
Some analysts and economists believe cryptocurrencies could replace the dollar as an international payment, which is also unlikely. will never replace the US dollar because of its high volatility, lack of centralized control, and limited integration into the global financial system.
In the Weekly timeframe, USDollar, after a strong fall in a long-term uptrend, formed an ascending triangle pattern, which is usually a classic bullish pattern. Bulls Power and MA200 indicate bullish sentiment in the market, so we can expect the to rise further on the rise above the resistance area.
● USDollar buying can be considered on a break above the resistance at 106.500, with a target of 109.000, corresponding to 61.8 Fibonacci.
Expert opinions reinforce the dollar’s staying power. Analysts from institutions like the IMF and JP Morgan emphasize that while de-dollarization is a trend to watch, the complete displacement of the dollar is unlikely. They highlight the resilience of the dollar’s dominance in global finance, particularly given its pivotal role in international transactions and reserves.
Conclusion
Despite the rising discourse on de-dollarization, the idea that the US dollar will lose its global dominance appears improbable. While countries like China and Russia actively pursue strategies to reduce their reliance on the dollar, the global financial system’s entrenched dependence on the greenback remains robust.
The dollar’s supremacy is underpinned by the extensive size and stability of the US economy, its influential geopolitical position, and the deep liquidity of its financial markets. These factors create a resilient foundation for the dollar, making a sudden shift towards alternative currencies highly unlikely.
