Exclusive news, data and analytics for nancial market professionals

World Business Markets Sustainability Legal Breakingviews Technology Investigations More My View Sign In Register

Currencies

The end of King Dollar? The forces at

play in de-dollarisation
By Naomi Rovnick and Libby George
May 25, 2023 6:19 AM GMT-3 · Updated 23 days ago Nasdaq, S&P 500 trade near 14-month highs

[1/2] A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao/File Photo

LONDON, May 25 (Reuters) - Rivalry with China, fallout from Russia's war in Ukraine
and wrangling once again in Washington over the U.S. debt ceiling have put the
dollar's status as the world's dominant currency under fresh scrutiny.

Russia's sanctions-imposed exile from global nancial systems last year also fuelled
speculation that non-U.S. allies would diversify away from dollars.

Below are some arguments why de-dollarisation will happen - or possibly why it
won't.

SLIPPING RESERVE STATUS

The dollar share of of cial FX reserves fell to a 20-year low of 58% in the fourth
quarter of 2022, according to International Monetary Fund data.

Stephen Jen, CEO of Eurizon SLJ Capital Limited, said that shift was more
pronounced when adjusted for exchange rate.

"What happened in 2022 was a very sharp plummeting in the dollar share in real-
terms," Jen said, adding this was a reaction to the freezing of half of Russia's $640
billion in gold and FX reserves following its 2022 invasion of Ukraine. This had
sparked a re-think in countries such as Saudi Arabia, China, India and Turkey about
diversifying to other currencies.

Reuters Graphics

TAKING THE LONGER VIEW

The dollar share of central banks' foreign reserves in the nal quarter of 2022 did hit
a two-decade low, but the move has been gradual and it is now at almost a similar
level as 1995.

Central banks put rainy day funds in dollars in case they need to prop up exchange
rates during economic crises. If a currency weakens too far against the dollar, oil and
other commodities traded in the U.S. currency become expensive, raising living costs
and fuelling in ation.

Many currencies, from the Hong Kong dollar to the Panama balboa, are pegged
against the dollar for similar reasons.

Reuters Graphics Reuters Graphics

WANING GRIP ON COMMODITIES

The almighty dollar has had a lock on commodity trading, allowing Washington to
hinder market access for producer nations from Russia to Venezuela and Iran.

But trade is shifting. India is purchasing Russian oil in UAE dirham and roubles.
China switched to the yuan to buy some $88 billion worth of Russian oil, coal and
metals. Chinese national oil company CNOOC and France's TotalEnergies completed
their rst yuan-settled LNG trade in March.

After Russia, nations are questioning "what if you fall on the wrong side of
sanctions?" said BNY Mellon strategist Geoffrey Yu.

The yuan's share of global over-the-counter forex transactions rose from almost
nothing 15 years ago to 7%, according to the Bank for International Settlements
(BIS).

Reuters Graphics

BUT TOO COMPLEX A SYSTEM

De-dollarisation would require a vast and complex network of exporters, importers,

currency traders, debt issuers and lenders to independently decide to use other
currencies. Unlikely.

The dollar is on one side of almost 90% of global forex transactions, representing
about $6.6 trillion in 2022, accordingto BIS data.

About half of all offshore debt is in dollars, the BIS said, and half of all global trade is
invoiced in dollars.

The dollar's functions "all reinforce each other", said Berkeley economics and
political science professor Barry Eichengreen.

"There just isn't a mechanism for getting banks and rms and governments all to
change their behaviours at the same time."

Reuters Graphics

A FRAGMENTED FUTURE

While there may not be a single dollar successor, mushrooming alternatives could
create a multipolar world.

BNY Mellon's Yu said nations were realizing that one or two dominant reserve asset
blocks was "just not diversi ed enough."

Global central banks are looking at a wider variety of assets, including corporate
debt, tangible assets such as real estate, and other currencies.

"This is the process that is underway," said Mark Tinker, managing director of
Toscafund Hong Kong. "The dollar is going to be used less in the global system."

AN UNSHAKEABLE BASIS

Because large bank deposits are not always insured, businesses use government
bonds as a cash alternative. The dollar's status is therefore underpinned by the $23
trillion U.S. Treasury market - viewed as a safe haven for money.

"The depth, liquidity and safety of the Treasury market is a big reason why the dollar
is a leading reserve currency," said Brad Setser, a Council on Foreign Relations fellow
who tracks cross-border currency ows.

International holdings of Treasuries are vast and there's no credible alternative yet.
Germany's bond market is relatively small, at just over $2 trillion.

Commodities producers may agree to trade with China in yuan, but recycling cash
into Chinese government bonds remains tricky due to dif culties opening accounts
and regulatory uncertainty.

"But you can hop on an app and trade Treasuries from anywhere," Natwest Markets
emerging markets strategist Galvin Chia said.

Reuters Graphics

($1 = 6.9121 Chinese yuan renminbi)

Reporting by Naomi Rovnick and Libby George, editing by Karin Strohecker and Alex Richardson

Our Standards: The Thomson Reuters Trust Principles.

Read Next
Newsletter | Every weekday.

Global Investor
Make sense of the market with highlights of
the latest news and trends in global nancial
markets.
Future of Money Asian Markets Future of Money Markets
Binance, SEC agree to Taiwan says will it keep Wyre winding down as World stocks ga
allow only US employees talking to US on forex crypto winter bites after big run, h Sign up
to access customer funds policies bank week

More from Reuters

Markets

Sports

Martin Tyler, the

voice of Premier
League, hangs up
his Sky mic
World
Veteran English soccer Saudi foreign minister arrives in
commentator Martin Tyler is Tehran amid rapprochement
hanging up his Sky Sports 8:45 AM GMT-3 . Updated an hour ago
microphone after more than 3…
28 min ago

Sports

Bagnaia takes
Coastal areas of India's pole at German
Gujarat state return to Grand Prix
normalcy after cyclone qualifying as
INSIGHT
World · June 17, 2023 · 9:14 AM GMT-3 · 21 min ago For groups ghting U.S. opioid Marquez crashes
Some 1,500 villages were still without electricity in India's crisis, settlement money can be
hard to come by
three times
western state of Gujarat, of cials said on Saturday, as coastal Ducati's reigning MotoGP world
8:44 AM GMT-3 . Updated an hour ago
areas recovered from the impact of this week's cyclone champion Francesco Bagnaia
Biparjoy. claimed pole position for the
German Grand Prix after…
7:44 AM GMT-3

Latest Browse Media About Reuters

Home World Videos About Reuters
Business Pictures Careers
Legal Graphics Reuters News Agency
Markets Brand Attribution Guidelines
Breakingviews Reuters Leadership
Technology Reuters Fact Check
Investigations Reuters Diversity Report
Lifestyle
Stay Informed
Download the App
Newsletters

Information you can trust Follow Us

Reuters, the news and media division of Thomson Reuters, is the world’s largest multimedia
news provider, reaching billions of people worldwide every day. Reuters provides business,
nancial, national and international news to professionals via desktop terminals, the world's
media organizations, industry events and directly to consumers.

Thomson Reuters Products Re nitiv Products

Westlaw Onesource Checkpoint Re nitiv Workspace Re nitiv Data Re nitiv World-Check

Build the strongest argument
relying on authoritative
content, attorney-editor
expertise, and industry
de ning technology.
The most comprehensive
solution to manage all your
complex and ever-expanding
tax and compliance needs.
The industry leader for online Access unmatched nancial
information for tax, data, news and content in a
accounting and nance highly-customised work ow
professionals. experience on desktop, web
and mobile.
Catalogue
Browse an unrivalled portfolio
of real-time and historical
market data and insights
from worldwide sources and
experts.
Screen for heightened risk
individual and entities
globally to help uncover
hidden risks in business
relationships and human
networks.

Advertise With Us Advertising Guidelines Coupons Cookies Terms of Use Privacy Digital Accessibility Corrections Site Feedback

All quotes delayed a minimum of 15 minutes. See here for a complete list of exchanges and delays. © 2023 Reuters. All rights reserved