There are growing calls to maneuver away from counting on the US dollar for trade.
More and more countries – from Brazil to countries in Southeast Asia – are calling for trade in currencies apart from the US dollar.
The U.S. dollar has dominated global trade for many years — not only because the United States is the world’s largest economy, but in addition because oil, a key commodity needed by all economies large and small, is priced in dollars. Most goods are also priced and sold in US dollars.
But since the Federal Reserve launched into a path of aggressive rate of interest hikes to combat domestic inflation, many central banks around the world have raised rates of interest to stem the outflow of capital and the sharp depreciation of their very own currencies.
“By diversifying their holding reserves right into a more multi-currency portfolio, perhaps they will ease the pressure on their external sectors,” said Fitch Solutions’ Cedric Chehab.
To be clear, the US dollar still dominates the world’s foreign exchange reserves, although its share of central bank foreign exchange reserves has fallen from over 70% in 1999 to IMF data to introduce.
The US dollar accounted for 58.36% of global foreign exchange reserves in the fourth quarter of last 12 months, in keeping with IMF data Currency composition of foreign exchange reserves (COFER). Compared, the euro is a distant second, accounting for around 20.5% of global foreign exchange reserves, while the Chinese yuan accounted for less than 2.7% over the same period.
China is one of the most energetic players on this attack given its dominant position in global trade at the moment and as the world’s second largest economy.
Based on CNBC calculations IMF data on trade directions in 2022Mainland China was the largest trading partner of 61 countries, combining each imports and exports. Compared, the United States was the largest trading partner for 30 countries.
“As China’s economic power continues to grow, it means it’ll exert more influence over global financial institutions and trade, etc,” Chehab told CNBC last week.
China – long in the top two foreign holders of US Treasuries – has been steadily reducing its holdings in US Treasuries.
Mainland China held US Treasuries price nearly $849 billion as of February this 12 months, the latest data from the US Treasury Department showed. That is the lowest value in 12 years, in keeping with historical data.
Changing dynamics
Economic advantages
Analysts say changing global economic dynamics are driving the so-called de-dollarization trend, which may gain advantage local economies in a number of ways.
Trading local currencies “allows exporters and importers to balance risks, have more investment opportunities, and be more confident about revenues and sales,” Brazil’s former ambassador to China Marcos Caramuru told CNBC last week.
One other profit for countries moving away from using the dollar as an intermediary in bilateral trade is “helping to maneuver up the value chain,” Mark Tinker of ToscaFund Hong Kong told CNBC.Street Signs Asia” in early April.
“It is not about selling low-cost stuff to Walmart, keeping prices low for American consumers to earn dollars to purchase energy. Now it’s about a very bilateral trade bloc,” Tinker said.
Meanwhile, the growth of economic blocs outside the US can be encouraging those economies to push for more use of their currencies. The The IMF estimates that Asia could contribute greater than 70% of global growth this 12 months.
“US growth may decelerate, but US growth isn’t any longer what that is all about. There’s an entire bloc outside of the US that is growing,” Tinker said. “I believe there will probably be a re-internationalization of flows.”
Geopolitical concerns
Geopolitical risks also accelerated the trend away from the US dollar.
“Political risk really helps to introduce lots of uncertainty and volatility around how much of a shelter the US dollar is,” said Galvin Chia of NatWest Markets.Asia road signs before.
Tinker said what precipitated the calls for de-dollarization was the US decision to freeze Russian foreign exchange reserves after Moscow invaded Ukraine in February 2022.
The yuan is reported to have replaced the US dollar as the most traded currency in Russia Bloomberg.
Up to now, the United States and its Western allies froze Russia’s foreign exchange reserves price greater than $300 billion and imposed multiple rounds of sanctions against Moscow and domestic oligarchs. This forced Russia to modify to trade other currencies and increase your gold reserves.
“Now it seems that for those who disagree with US foreign policy, you risk having those assets confiscated or frozen. You have to have another place to place these assets,” said Tinker. In the Middle East, a serious oil exporter Saudi Arabia has reportedly signaled that it’s open to trading in currencies apart from the dollar.
While analysts don’t anticipate an entire break with dollar-denominated oil trading in the short term, “I believe they’re saying more that there is yet one more player on the town and we wish to have a look at how we trade with them on a bilateral basis using the yuan,” he said. Chehab.
The dollar still reigns
Despite the slow erosion of its hegemony, analysts say that the US dollar is not going to be dethroned in the near future – just because there are currently no alternatives.
“Euro is a somewhat imperfect fiscal and monetary union, Japanese yenwhich is one other reserve currency, has all sorts of structural challenges with its high debt burden,” Chehab told CNBC.
The Chinese yuan can be insufficient, Chehab said.
“When you have a look at yuan reserves as a share of total reserves, that is only about 2.5% of total reserves, and China still has current account restrictions,” Chehab said. “This implies it’ll be an extended time before some other currency, any single currency, really usurps the dollar from this attitude.”
Data from the IMF show that as of the fourth quarter of 2022, greater than 58% of global reserves are held in US dollars – greater than double the share of the euro, the world’s second most held currency.
The international reserve system “continues to be a system dominated by US reserves,” said Chia of NatWest.
“Until this proves the majority, until you’ve got one other currency system or economy that’s willing to attain this international reach, convertibility and free movement and responsibility for the reserve currency, it’s hard to say that the dollar will probably be displaced in the next 3 to five years, unless someone shows up.”
— Joanna Tan and Monica Pitrelli of CNBC contributed to this report.