Since World War Two, the US dollar has functioned as the world’s reserve currency, which means that financial institutions and central banks hold lots of it for their strategic use. Lately, however, when it comes to global trade, there is a movement away from the USD and towards the use of other assets, casting the dollar’s dominance in a questioning light. China, for instance, has made an agreement with Brazil that the two nations should trade in their own currencies rather than the greenback. French Prime Minister Emmanuel Macron recently said in an interview that Europe should depend less on the “extraterritoriality of the US dollar”.
Importantly too, when Russia invaded Ukraine last year, western nations sanctioned their central bank, making it impossible for Russia to transact with $300 billion worth of assets denominated in dollars or euros. This may have hastened the counter-dollar momentum because it “increased the perceived risk that those debt assets can be frozen in the way that they’ve been frozen for Russia”, explains Ray Dalio of Bridegwater.
Not everyone agrees that a significant shift away from dollar usage is underway. “When people ask whether the dollar is going to lose its reserve currency status, I think that’s dubious”, remarks BlackRock’s Rick Rieder. Managing Director of the IMF (International Monetary Fund), Kristalina Georgieva agreed with this viewpoint near the end of May, and so did Goldman Sachs.
But what are the biggest threats to the dollar’s pre-eminent status, and what is the real nature of the threat? Take a break from your online trading on iFOREX’s much-praised mobile platform to get some answers.
The Yuan and the Euro
China has made efforts to spread the use of its currency, the yuan, on the international scene for several years now. Aside from making its pact with Brazil, Beijing has also been paying for Russian oil, not in dollars, but yuan. This indicates “China does not want its currency to remain domestic”, in the opinion of Abishur Prakash of The Geopolitical Business. Indeed, as of May this year, most international monetary transaction involving China were conducted in yuan.
However, “It is important to differentiate between increased international usage of RMB and de-dollarization”, insists Rory Green of TS Lombard, using the abbreviation for renminbi – the official name of the yuan. He points out that, looking at March 2023, just 2.3% of cross-border payments on the global SWIFT financial network were made in yuan, while 42% were made in USD. Rather, Green explains, when people speak about the yuan assuming the status of a reserve currency, they usually have in mind China’s growing economic clout on a world scale, which is a separate issue.
Since 2018, the European Union has promoted the use of the euro for international payments. One-fifth of the foreign exchange reserves in the world are held in euros, making it number two after the USD, so that “The only currency that is vaguely close to being able to replace the dollar is the euro”, in the words of Vestact.
Central banks have been buying gold in truckloads for the past year and, in Q1 2023, they picked up 228.4 tons of the stuff, signifying a 176% leap from the same period last year. “The oldest and most traditional of assets, gold, is now a vehicle for central bank revolt against the dollar”, writes Ruchir Sharma of Rockefeller International. Interestingly, even within the USA itself, there may be a movement toward precious metals at the expense of the dollar. 23 US states have either accepted them as legal tender already or are planning to do so.
Still, argues Kristalina Georgieva, dollars will probably occupy the lion’s share of world forex reserves for the time being, “because of the strength of the US economy and the depth of its capital markets”.
For venture capitalist Chamath Palihapitiya, even the weakening of the dollar after a long streak of dominating its forex partners won’t knock it off its perch because, once its value goes down, foreign nations “all of a sudden find the ability to import a little bit cheaper… but the US dollar actually still does well”. In addition, he points out, the Chinese government stands in the way of the yuan establishing itself as a mainstay of global trade by controlling it so closely.
Rick Rieder reminds us, though, that “we keep chipping away at the impenetrable armor of the dollar”, referring to increased use, all over the world, of the yuan and euro, gold, and cryptocurrency. He adds that, if the US debt ceiling is raised, the ratings of American Treasury Bonds could drop, and this would alter the way “international investors and other investors would view our debt”, which could be detrimental to the USD.
Continuing to read about both sides of the argument is likely to enhance your understanding of current global economic and political trends, which can only give you an added edge in your online trading. If you trade forex pairs on the iFOREX platform, you can enjoy, not only live rates on your pair of choice, but also quality educational materials and a stream of financial news.