Weekly Buzz: Pulling back the curtain on de-dollarisation

21 April 2023

💵 De-dollarisation: unlikely in the near-term, but not impossible in the (very) long run

Over recent weeks, there’s been a lot of chatter about “de-dollarisation.” According to GlobalData, discussions about de-dollarisation on social media platforms surged 600% in the first quarter of 2023, and even news outlets and investment houses have joined the party. 

To be clear, talk about de-dollarisation isn’t new – the issue has been kicked around since the 1980s. However, in light of the events driving today’s talk about the topic, it’s worth exploring what’s behind all the buzz. 

🔍So, just what is de-dollarisation? 

Simply put, de-dollarisation is the process of reducing reliance on the US dollar for its use in international trade or as a reserve currency. (See Jargon Buster for more on that.)

Events after the end of World War II led to the dollar becoming entrenched as the world’s dominant currency. Add to that the size of the US’s financial markets, its geopolitical influence, and the dollar's stability, it makes sense why the dollar now dominates international trade and global payments. The Bank for International Settlements estimates the greenback is involved in 88% of all international FX transactions, about half of global trade, and accounts for just under 60% of global FX reserves. 

🗣️Why is everyone talking about de-dollarisation now? 

Recent events are driving de-dollarisation’s current trendiness. First, US financial sanctions against Russia have prompted other countries to ask whether they could be next – and, as a result, some are looking for alternatives to the dollar as a way to circumvent what certain corners are calling a “weaponisation” of the currency. 

The big swings in the value of the US dollar over the past year – due largely to the Fed’s aggressive rate hike cycle – have also contributed to concerns about the currency’s dominance, especially among major emerging markets (EMs). Indeed, we’ve seen more movement among EMs to explore alternatives to the dollar. For example, in March, Brazil and China jointly agreed to trade in their own currencies, while Malaysia has allowed trade with India to be carried out in rupees. 

💸 Is this the end for the dollar? 

The short answer is no – at least not in the near-term.. 

At the moment, US financial markets are still the world’s most open and liquid, and no other currency comes close to replacing the dollar. The euro, in comparison, comprises 31% of transactions, while China’s yuan accounts for just 7%. That situation is unlikely to change overnight, but it could happen gradually over time. If you take history as a guide, past shifts in the global monetary order have taken decades. One  possible scenario for the longer-term: other currencies could emerge as viable alternatives alongside the dollar, leading to a multi-currency system. 

🌎 In other news…

🇨🇳 China posts better-than-expected Q1 growth 

On Tuesday, GDP data from China showed growth rebounding in the world’s second-largest economy. After a dismal 2022, China’s economy expanded by 4.5% in Q1 2023. If sustained, this could place the People’s Republic on track to meet or exceed its 5% growth target for the year. 

It is unclear, however, how long growth momentum can continue. Consumption powered much of the rebound as the scrapping of Covid restrictions boosted retail sales. But that reopening boom may be tough to sustain. And despite exports bouncing back to 14.8% year-on-year growth in March, economists expect weaker growth ahead due to slumping global demand. 

🎓J argon buster: Reserve currency 

A reserve currency is a currency that’s held in large quantities by central banks and other monetary authorities as part of their foreign exchange (FX) reserves. These currencies are typically issued by developed, stable economies. Because of their dominance, reserve currencies also tend to be used for international payments, trade, and investments. Today, the US dollar is the dominant reserve currency, but other major currencies can also be considered reserve currencies – including the euro, yen,pound sterling, and (increasingly) the yuan. 

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