Calls to stop relying on the US dollar for international trade are growing.
More and more countries – from Brazil to Southeast Asian nations – are asking for trade to be conducted in currencies other than the US dollar.
The US dollar has been the king of global trade for decades – not only because the US is the largest economy in the world, but also because oil, an essential commodity needed by all large and small economies, is priced in dollars. Most commodities are also priced and traded in US dollars.
But since the Federal Reserve embarked on an aggressive interest rate hike journey to combat domestic inflation, many central banks around the world have had to raise their interest rates to curb capital outflows (toward the US market) and a sharp depreciation of their own currencies.
For now, the US dollar remains dominant in global foreign exchange reserves, although its share in central bank reserves has fallen to over 70% since 1999, according to IMF data.
The US dollar accounted for 58.36% of global foreign exchange reserves in the fourth quarter of last year, according to data from the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER). In comparison, the euro occupies a distant second place, accounting for about 20.5% of global foreign exchange reserves, while the Chinese yuan represented only 2.7% in the same period.
China is one of the most active players in this attempt to undermine the dollar’s hegemony, due to its dominant position in global trade at the moment and being the second-largest economy in the world.
Based on IMF data on trade direction in 2022, mainland China was the largest trading partner of 61 countries when combining imports and exports. In comparison, the US was the largest trading partner of 30 countries.
Mainland China – long among the top 2 foreign holders of US Treasury securities – has been steadily reducing its holdings of US Treasury bonds.
Mainland China held nearly $849 billion in US Treasury securities in February of this year, the latest data from the US Treasury Department showed. This is the lowest level in 12 years.
Changing the Dynamics
But China is not the only country calling for a change regarding the hegemony of the US dollar.
Brazilian President Luiz Inácio Lula da Silva made a state visit to Beijing in April and called for a reduction in dependence on the US dollar for global trade.
Trade between Brazil and China reached $150 billion in 2022, a 10% jump from the previous year, according to S&P Global Market Intelligence.
During a recent visit to China, Malaysian Prime Minister Anwar Ibrahim reportedly suggested the creation of an “Asian Monetary Fund” to reduce dependence on the US dollar. In an April 6 interview with CNBC, Malaysia’s trade minister also acknowledged Malaysia’s concerns about Asia’s dependence on the US dollar.
At the ASEAN finance ministers and central bank governors meeting in Indonesia in March, policymakers also discussed the idea of reducing their dependence on the US dollar, the Japanese yen, and the euro, and “shifting to agreements in local currencies.”
In early April, Indian media widely reported that the Ministry of External Affairs (MEA) announced that India and Malaysia were starting to conduct trade using the Indian rupee.
Economic Benefits
Analysts say that de-dollarization could benefit local economies in several ways.
Trading in local currencies “allows exporters and importers to balance risks, have more options for investment, and have more certainty about revenues and sales,” said former Brazilian ambassador to China, Marcos Caramuru, to CNBC last week.
Another benefit for countries moving away from using the dollar as an intermediary in bilateral trade is that it can “help them move up the value chain,” said Mark Tinker of ToscaFund Hong Kong to CNBC’s “Street Signs Asia” in early April.
Meanwhile, the growth of economic blocs outside the US also encourages these economies to push for broader use of their currencies. The IMF estimates that Asia could contribute over 70% to global growth this year.
The Dollar is Still King
Despite the slow erosion of its hegemony, analysts say that the US dollar is not likely to lose its dominance in the near future – simply because there are no alternatives at the moment.
IMF data shows that in the fourth quarter of 2022, more than 58% of global reserves were held in US dollars – that is more than double the share of the euro, the second most held currency in the world.
Thus, the international reserve system is still a system dominated by US reserves.
Source: CNBC