Is the world really ditching the dollar?
With some central banks looking to minimize their dependence on the king of currencies, is the US dollar likely to be dethroned? This is an old story told anew.
A few leaders from the BRICS nations—Brazil, Russia, India, China, and South Africa—are again challenging the status of the US dollar as the world’s most dominant currency. They have been vocal about creating a common currency to settle payments for the bloc’s trade of goods and services.
This clamor for de-dollarization is not new. Countries have been attempting to reduce their dependence on the US dollar for years now. And yet, despite America accounting for only 10% of global trade, 40% of international trade in goods is still invoiced in US dollars, and over 58% of the world’s foreign exchange reserves are in US dollars—the Euro comes as a far second, with a 20% share.
Defense against the dollar
What belies the recent worries on the decreasing use of the dollar is a slate of sanctions imposed on Russia for its invasion of Ukraine, which has necessitated their search for alternative currencies. The latest financial sanctions include freezing Russia’s foreign currency reserves, which, unlike most countries, have actually long been de-dollarized.
In 2014, Russia’s annexation of Crimea prompted the US to lead the imposition of sanctions that would cut off Russia’s access to financial infrastructures. Shortly thereafter, Russia dumped its holdings of US Treasuries and significantly reduced the share of US dollars in its reserves to hedge the damage from further financial sanctions. It has since turned to alternative stores of value such as gold, the yuan, and the euro.
The latest western sanctions have prompted Russia to increase the volume of transactions in yuan, which is now its most traded currency. This is no surprise, given that China is now the top buyer of oil from the sanctioned producer, and it bodes well for China’s long-running campaign to internationalize the yuan.
China has been central to this discussion, with its efforts to speed up de-dollarization and the broader use of the yuan. Contrary to most claims, however, China has not totally rejected the US dollar. According to Bloomberg, only 17% of overall trade was settled in yuan in 2022. The share of crude oil was only 13% of China’s total imports.
Therefore, the decreased use of the petrodollar (and a shift to “petroyuan”) is unlikely to erode the dollar’s overall importance, at least for now. In financial assets, even though China’s holdings of US Treasuries have dwindled significantly, it has reportedly merely shifted to higher yielding securities that are still dollar denominated.
It could really take a while before the yuan comes close to the dollar in terms of market share in global transactions.
Banking on gold
Gold has also gained attention as more central banks have reportedly been stockpiling on the precious metal. But will this lead to the dollar’s eventual demise? Not exactly.
Large amounts of gold purchases can end up being unreported, which sanctioned economies take advantage of, to circumvent the restrictions imposed on them.
While it is likely that some central banks shift to gold to hedge their economies from sanctions, it is also highly likely that the current macroeconomic backdrop has attracted them to diversify their portfolios with more gold.
Our technical analysis of the price of gold, according to Kyle Tan, Metrobank Trust Investment Officer, shows upside momentum to USD 2,300 to 2,800 per ounce, because of broad dollar weakness, negative US real interest rates, growth slowdown concerns, and geopolitical risks.
To the downside, short-term dollar strength could trigger a pull-back to USD 1,950. Whereas sentiment drives demand for gold, the breadth of use and the depth of markets solidify real money demand for the dollar.
Dollar is still king
Assessing how the dollar is so entrenched in global trade and in financial markets, and how no other currency comes close as a viable alternative, a reduction in the use of the dollar may challenge its dominance, but it will take a very long time for it to be trumped.
For the foreseeable future, it is highly unlikely for the US dollar to be dethroned as king of currencies.
PATTY MEMBREBE is a Financial Markets Analyst at Metrobank – Institutional Investors Coverage Division, under the Market Strategy and Advisory Section. She communicates strategies on fixed income, rates, and portfolio solutions for our high-net-worth individual and institutional clients. She holds an AB Economics degree from Ateneo de Manila University and is currently pursuing graduate studies. In her free time, she enjoys watching indie films and attending gigs to support local indie music.