Dollar not ready to cede global role

Rivalry with China, fallout from the war in Ukraine and wrangling over the US debt ceiling have put the dollar’s status as the world’s dominant currency under fresh scrutiny.

Russia’s exile from global financial systems has also fuelled speculation that non-US allies would diversify away from dollars.

The dollar’s share of foreign-exchange reserves fell to a 20-year low of 58% in the fourth quarter of 2022, IMF data show.

Stephen Jen, CEO of Eurizon SLJ Capital Ltd, said that shift was more pronounced when adjusted for exchange rates.

“What happened in 2022 was a very sharp plummeting in the dollar share in real terms,” Jen said, adding this was a reaction to the freezing of half of Russia’s $640 billion in gold and FX reserves following its 2022 invasion of Ukraine. This sparked a rethink in countries such as Saudi Arabia, China, India and Turkey about diversifying to other currencies.

The dollar’s share of central banks’ foreign reserves is at a two-decade low, but the move has been gradual and it is now at almost a similar level as in 1995.

The almighty dollar has had a lock on commodity trading, allowing Washington to hinder market access for producer nations from Russia to Venezuela and Iran.

But trade is shifting. India is purchasing Russian oil in UAE dirham and roubles. China switched to the yuan to buy $88 billion in Russian oil, coal and metals. The Chinese oil company CNOOC and France’s TotalEnergies completed their first yuansettled LNG trade in March.

After Russia, nations are questioning “what if you fall on the wrong side of sanctions?” said BNY Mellon strategist Geoffrey Yu.

The yuan’s share of global over-the-counter forex transactions rose from almost nothing 15 years ago to 7%, according to the Bank for International Settlements (BIS).

But de-dollarisation would require a vast network of exporters, importers, currency traders, debt issuers and lenders to independently decide to use other currencies. This seems unlikely.

The dollar is on one side of almost 90% of global forex transactions, or about $6.6 trillion in 2022. About half of all offshore debt is in dollars and half of all global trade is invoiced in dollars.

The dollar’s functions “all reinforce each other”, said Berkeley economics professor Barry Eichengreen. “There just isn’t a mechanism for getting banks and firms and governments all to change their behaviours at the same time.”