Global de-dollarization: Is the dollar under siege?
Understanding the implications of the initiatives to challenge the U.S. currency dominance worldwide.
The concept of de-dollarization has captured the interest of policymakers, economists, business executives, and financial experts. The term refers to the gradual decline in reliance on the U.S. dollar in international trade and finance — a phenomenon that could be the sign of a reshaping of the established order of the world’s reserve currencies.
It is true that the dollar’s dominance appears to be “alive and well”, such as the U.S. currency’s high share in global transactions and reserves. It does not appear that the issue of de-dollarization is something that corporate executives or policymakers should be concerned about in the short and medium term. At the same time, however, ignoring the initiatives aiming to promote a long-term shift in this area and the technological innovations that may potentialize their impact also doesn’t seem sensible.
To make sense of this, we’ll first look at two emerging mechanisms being proposed to challenge dollar dominance. One of these is the increasing usage of the so-called “currency basket settlements” in international trade and finance operations; another is the development of central bank digital currencies (CBDCs). Both present opportunities and challenges for countries willing to diversify their monetary options.
Currency Basket Settlements
In currency basket settlements, a combination, or “basket”, of currencies is utilized to settle payments associated with financial agreements or transactions.
The use of these settlements in trade, investment, and finance operations has increased in recent years as companies and governments across several countries seek to mitigate the limitations of settling transactions predominantly in U.S. dollars.
Currency baskets provide greater flexibility for all stakeholders involved in these operations and reduce the risks associated with the volatility of the dollar and overreliance on a single currency.
The growing popularity of these solutions indicates a concerted effort to disrupt the traditional U.S. dollar dominance in global transactions. More broadly, it also points to a growing trend toward a multi-currency world, where the roles of individual currencies, particularly the U.S. dollar, will be reevaluated.
CBDCs (Central Bank Digital Currencies) are another mechanism countries and international stakeholders can utilize to drive the de-dollarization wave.
Today, around 130 countries are engaged in CBDC initiatives to digitize their national currencies. According to the International Monetary Fund (IMF), 93% of the world’s central banks are considering the adoption of CBDCs.1
In recent years, central banks across the globe have been developing these digital currencies, partly as a response to the growth of the cryptocurrency industry. CBDCs also aim to improve the convenience and efficiency of cross-border payments. Wholesale cross-border payments between financial institutions are ostensibly the first CBDC use case to represent considerable transaction volume, as represented by the mBridge project, a CBDC initiative between China, UAE, Hong Kong and Thailand.
The BRICS’s De-dollarization Endeavors
Russia has been at the forefront of a series of de-dollarization strategies, partly in response to the sanctions imposed by the U.S. and allies. According to President Vladimir Putin, the de-dollarization trend is irreversible, and Russia has gradually managed to reduce its reliance on the U.S. dollar in international trade. The country has also cut down on its dollar-denominated reserves, increasing the share of reserves denominated in euros, yuan, and gold.
Another initiative linked to Russia’s de-dollarization efforts has been the development of a digital version of the country’s official currency, the ruble, which can be used for cross-border transactions.
China is also a major advocate for de-dollarization. Since the 2008 financial crisis, the country has taken significant steps to reduce its reliance on the U.S. dollar, establishing global clearing centers for transactions denominated in its official currency, the renminbi, and signing numerous currency swap agreements. The digital yuan2 is also likely to be a game-changer in the Chinese efforts to challenge the dollar’s supremacy, providing a credible alternative to the U.S. currency.
Other key initiatives could emerge as a result of the collaboration between Russia and China to create alternatives to traditional financial systems dominated by Western countries. For example, according to Reuters, over the past year most of (exact share not disclosed) China’s oil imports from Russia started to be denoted in yuan. The same phenomenon started to happen after the Ukraine war with other major commodities from Russia, which totaled $88 billion in 2022, a 52% increase YoY.
The BRICS Pay initiative
Another example of potential cross-country collaboration within the BRICS is BRICS Pay, a financial settlement platform to streamline transactions among BRICS countries and advance de-dollarization. It has been in development for since 2018 and not officially launched.
Using blockchain technology, BRICS Pay would ensure secure and decentralized transactions, enabling real-time interactions between countries. It is not a central bank digital currency (CBDC) or a cryptocurrency, but rather a digital service that allows the use of native BRICS currencies in cross-country operations.
BRICS Pay would serve multiple purposes, including facilitating international trade, streamlining cross-border payments between companies, supporting investments, and fostering microfinance initiatives. Its implementation is already underway, with financial institutions like the U.K.’s Standard Chartered Bank incorporating the platform into their digital payment infrastructure.
Is the dollar actually under siege?
While de-dollarization efforts are gaining momentum, it is crucial to acknowledge that the U.S. dollar’s status as the world’s primary reserve currency remains unchallenged for the time being. The euro, the British pound, the Japanese yen, and the Chinese renminbi are still far behind the U.S. dollar in terms of global transactions.
De-dollarization efforts have been primarily driven by countries like Russia and China, which aim to mitigate the impact of U.S. sanctions, reduce their dollar dependency, and advance trade initiatives. Despite some advances — such as Brazil and China beginning to use the yuan in bilateral commerce — the overall impact of these de-dollarization endeavors remains modest.
Today, the U.S. dollar accounts for 69% of global currency usage, compared to the euro’s 23%. The dollar also constitutes approximately 60% of disclosed foreign currency reserves worldwide and remains the preferred choice for debt issuing. According to the NY Fed, roughly half of all global debt securities, cross-border loans, and trade invoices are denominated in dollar, a testament to the trust placed in this currency by both private companies and governments.
The prominence of the U.S. dollar is further evident in foreign exchange (FX) trading. A staggering 88% of all over-the-counter FX transactions involve U.S. dollars. Meanwhile, the Chinese yuan’s share in FX transactions stands at 7%. The yuan also accounted for only 2% of all FX reserves in Q2 2023, with a significant portion of this total being held by Russia.
Even considering the ongoing efforts toward de-dollarization, the present trajectory only suggests a slow and gradual decline in the worldwide use of the dollar. The U.S. currency’s share of global reserves is expected to decrease by a modest 12% in the next 24 years.3 This resilience sheds light on the enduring trust and preference for the U.S. dollar in the international financial landscape.
Fueled by the rise of CBDCs and shifting global geopolitical dynamics, de-dollarization is a complex and evolving phenomenon. While the dollar hegemony is not under significant threat in the short and medium terms, the collective efforts of several countries to explore alternatives and digitize their currencies seem to indicate that a major transformation process is brewing in the world’s financial landscape.
The coming years will likely witness the continued rise of CBDCs and the development of various de-dollarization strategies. Thus, it is reasonable to assume that in the long term, these two trends will help reshape the future of global finances.
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