Support for de-dollarization is growing worldwide, and this shift away from the US dollar as the dominant currency in the global financial system is set to continue. Advancements in financial technology are expected to facilitate this transition, as central banks seek to settle transactions directly with each other using non-Western currencies. Additionally, the use of central banks’ digital currencies for international transactions could help reduce costs associated with economic transactions.
Despite the fact that the US only accounts for about 24% of the global economy, the US dollar has been widely used in international transactions for many years. In 2002, the dollar accounted for 58.4% of central banks’ international reserves, according to the IMF. By April 2023, it had a 59.7% share of interbank transfers, according to SWIFT. This dominance can be attributed to factors such as the size of the American economy, the influence of US multinationals, and the political power of the United States.
However, recent events have raised concerns about the risks associated with using the US dollar. The blocking of the Bank of Russia’s reserves by Western countries, as well as financial sanctions against Russian banks and companies, have highlighted the non-economic risks of dollarized assets. Central banks are now more aware of these risks and are questioning the advantages of dollarization.
In response to these risks, Russia has started conducting operations in Chinese yuan since the beginning of 2023, and Russian companies are restructuring their foreign-trade operations to use currencies of “friendly” countries. Although there has been a steady decline in the share of US currency in international reserves over the past few decades, the mass abandonment of the US dollar by central banks has not been observed. The lack of viable alternatives that can absorb significant amounts of central bank savings is one of the main reasons for this.
The Eurozone government bond market is fragmented, with many countries having low credit ratings. The Chinese yuan is not freely convertible and is under strict control of the National Bank of China. Gold, while a good hedge in times of crisis, lacks interest income and liquidity. This uncertainty surrounding alternative assets and currencies has prevented central banks from making a dramatic shift away from the US dollar.
Furthermore, the approach to managing and accumulating foreign assets has been changing. While the nominal share of the US dollar in international reserves may be declining slowly, the focus is shifting towards creating external assets in non-standard forms. Sovereign wealth funds, state banks, and development institutions are being utilized outside of traditional central bank reserves. This strategy aims to protect against political risks and provides more flexibility in foreign markets.
China, in particular, is actively pursuing a similar strategy to internationalize its currency, the yuan. China aims to secure the international status of the yuan through trade rather than investment. It has encouraged trade in yuan by developing infrastructure, its own payment systems, and international lending in yuan. The concept of the “petroyuan,” which involves signing long-term contracts for oil supply in yuan, has gained traction. This strategy creates demand for yuan outside of the Chinese economy, while also maintaining capital transaction restrictions.
Overall, the de-dollarization of the global financial system will continue, driven by advancements in financial technology. Central banks are expected to seek direct clearing of each other’s currencies, reducing dependency on Western currencies. The use of central banks’ digital currencies for international transactions may further reduce costs for economic agents. However, this transition will be a gradual process, and a fundamental change in the global financial system is not expected in the foreseeable future.