Is De-Dollarization Underway?

Multiple factors are coming together, driving countries in Asia, Latin America, the Middle East, and others to seek alternatives to the dollar.

• The dollar’s share as the global reserve currency has fallen above 50%.
• Bitcoin is an alternative to break the dollar’s hegemony.

Is De-Dollarization Underway? The dollar is under threat as many countries explore methods to trade without the U.S. currency. This situation induces uncertainty about the dollar’s chances of maintaining the dominance that has allowed it to rule the financial world for almost eight decades.

Dollar Hegemony

Efforts to reduce the dollar hegemony and achieve de-dollarization are not new. It is something that has been discussed and analyzed for several years. Still, currently, multiple events come together and raise serious doubts that the United States can sustain, for much longer, the dollar as king over the world economy.

From several analysts’ viewpoints, de-dollarization is underway. However, most agree that it will take decades or even generations. Other economists reject that the dollar has begun to lose its reserve currency status. They cite, among other reasons, the dominance of the U.S. currency in international trade and the fact that it is an asset that is the foreign exchange reserve of central banks in every corner of the globe. So far, in 2023, however, several key developments have occurred, indicating that the global economy’s de-dollarization is accelerating. Here are five of them.

China, Russia, Brazil, and other countries express doubts

Since the end of March, global de-dollarization has peaked as several countries doubted the dollar. On the one hand, China and Russia signed a trade agreement that de-dollarizes from the dollar and focuses on the Chinese yuan as the main currency for trade in different items.

From that moment on, from Latin America to Africa, the Middle East, Europe, Asia, and more and more countries are embarking on plans or implementing programs to achieve their de-dollarization. In this regard, the group of emerging economies formed by Brazil, Russia, India, China, and South Africa (BRICS) captured the world’s attention when in late March, they announced the creation of an alternative economic system that includes a new reserve currency.

BRICS are big and crowded

People focused their attention on this announcement because these are the biggest countries in the world, both in terms of surface area and population. Moreover, together, they account for 32% of the world’s GDP. Some estimate that they will reach around 50% of GDP by 2030. Furthermore, the GDP of the BRICS nations and their potential currencies represent the most significant threat, so far, to the dominance of the U.S. dollar. And indeed, these countries have already surpassed the G7 nations in GDP (Purchasing Power Parity), as some people note on social networks.

In 2014, the BRICS countries founded the “New Development Bank” (NDB) with a seed capital of US$50 billion as an alternative to the International Monetary Fund and the World Bank. They also have the Contingent Reserve Arrangement (CRA), created to support partners in payment difficulties. 

These institutions, alternatives to the IMF and the World Bank, are offers that interest other countries ready to join the BRICS club. Among them are Saudi Arabia, the United Arab Emirates, Egypt, Algeria, Argentina, Mexico, and Nigeria, as confirmed by South African Foreign Minister Naledi Pandor during an interview. With more allied countries, the strategic partnership to eliminate the U.S. dollar as the world’s reserve currency expands.

Money as a Weapon in China-U.S. economic war

Economist Nouriel Roubini believes the cold war between the U.S. and China is getting more complex by the day. From Roubini’s comments, we understand that part of China’s plan to redefine global supremacy involves taking advantage of the financial crisis that the United States is going through to undermine the status of the dollar and replace it with the yuan as far as possible.

For this reason, the Asian country is increasingly promoting the yuan as a currency for the oil business, challenging the dollar’s leadership in the commodities markets and trying to weaken U.S. hegemony. In this regard, the United States struck a blow to itself when it imposed sanctions, isolating Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and effectively cutting off their entry to the global financial system.

U.S. power projection

With that action, the U.S. government sent a note to the world signifying that the U.S. dollar and the U.S. economy are no longer so safe for nations’ interests. And from there, there has been an increase in international trade with other currencies. For example, India and Russia can now trade rupees through Dubai banks.

So, while the U.S. spreads fear with more sanctions and puts the dollar’s dominance at risk, as Treasury Secretary Janet Yellen acknowledged, China continues to establish trade lines with many countries. It is boosting its direct yuan-based transactions without needing U.S. dollar intermediation. 

China also promotes using alternative payment systems like the Cross Border Interbank Payment System (CIPS). They want to provide a viable alternative to SWIFT for international transactions. In short, using the U.S. dollar as a weapon through sanctions, geopolitical realignments, and the emergence of alternative financial infrastructures combine to boost the de-dollarization of the global economy.

Alternative payment systems are what the Republican Senator Marco Rubio spoke about, who believes that in 2028 approximately, there will no longer be the discussion of U.S. sanctions.

“There will be so many countries that carry out transactions in currencies other than the dollar that we will not have the capacity to sanction them.”

Sen. Marco Rubio

Two alternatives to the U.S. dollar are on the rise: bitcoin and gold.

With more countries seeking alternatives to the dollar, economist Stephen Jen warns that the U.S. currency is losing its reserve status faster. “The dollar now accounts for about 58% of total global official reserves, down from 73% in 2001 when it was the undisputed hegemonic reserve,” the former Morgan Stanley analyst wrote in a recent report.

He estimates that the U.S. dollar’s share as the global reserve currency will decline ten times the average rate of the past 20 years. “Investors should appreciate that, while the Global South cannot completely avoid using the dollar, much of it is no longer willing to do so,” the analyst wrote. Indeed, central banks in China, Russia, and other countries are shedding their dollar reserves to buy gold.

The way they approached the asset during the first months of 2023 yielded record figures; since, at that time, the leading financial entities of the States bought more than 120 tons of gold. The sum represents the best start of the year since 2010, as far as the acquisition of gold by these financial entities is concerned.

Bitcoin potential

And to that same extent, some countries appreciate Bitcoin’s potential for international payments. Russia is one of them, and the United Arab Emirates free zone is exploring Bitcoin payments for services. In Africa, bitcoin is making inroads, so much so that the cryptocurrency could become an asset in everyday use across the continent.

“I think, in the future, in about ten years, there could be a situation where countries start declaring bitcoin as legal tender,” said Marius Reitz, general manager for Africa at cryptocurrency exchange Luno. Maya Caddell, chief of staff at Web3 startup Nestcoin, agrees with Reitz’s sentiments, and to back up her view, she relies on data from the IMF. Africa’s population will double from 1.3 billion to 2.6 billion by 2050. In contrast, Western people are in steady decline.

It means that “within a few years, one in six Internet users in the world will be African,” Caddell explained. He adds, “One in three young people worldwide, those between the ages of fifteen and thirty-five today, will be African by 2050.” They will likely be using Bitcoin and stablecoins to make payments.

The influence of the United States as a world leader weakens

Now, the influence of the United States as a world leader is waning. Emerging markets and developing economies are snowballing and have significant economic potential. The trend towards global multi-polarization is increasingly evident, which is the critical driver of de-dollarization.

European Central Bank President Christine Lagarde, discussing power projection, said that as more countries increase their yuan reserve holdings (Paywalled), their dependence on the U.S. dollar and the euro has diminished. Lagarde clarifies that the U.S. dollar and the euro are becoming less and less used as international currencies. 

She also said that the Sino-U.S. dispute “exacerbates tensions” and will shake the “dominance” of the dollar. Lagarde noted that less resilient global supply chains would make the economy more unstable and that an escalation in geopolitical tensions could foster multipolarity. She mentioned that China had become the world’s largest exporter, so more and more countries use the yuan for international trade while increasing their holdings of the Chinese currency as reserves. 

It is decreasing the use of the dollar, and “so far, the data do not show major changes in the use of international currencies,” Lagarde said. “But they suggest that we can no longer take the international currency status for granted.” Her comments reflect broader fears among policymakers at the IMF and World Bank annual meetings that growing political tensions will have a toll on the global economy by disrupting trade in dollars, which, from their perspective, will weaken growth and increase inflation.

A new world order begins to take shape

“We are seeing the birth of a new world monetary order that would undermine the current dollar-based system and lead to higher inflation in the West,” says economic analyst Ramón Casilda. His analysis focuses on the fact that “Western central banks, prisoners of the sanctions imposed by their governments, will not be able to provide support such as the emergency liquidity needed to close market gaps.” 

However, it warns that the People’s Bank of China (PBOC) faces no such constraints and is, therefore, in a privileged position, which could pave the way for the de-dollarization of the global economy. The World Bank itself recognizes that the U.S. dollar-based economy has failed to the point of falling into a period of skyrocketing poverty and diminishing resources to meet future challenges.

“A lost decade for the global economy could be in the making,” notes the financial institution. Economists from various parts of the planet agree that the global economic outlook only tends to darken. Some see the end game of the dollar coming and a substantial impact on the world economy. 

It happens that with the same intensity with which today people are talking about the de-dollarization of the economy, it also highlights the birth of a new world order leaving on the scene several currencies to occupy the vacant crown: the euro, China’s yuan, or bitcoin. Indeed, bitcoin will benefit from all that is happening, noted analyst Zoltan Pozsar of the renowned Swiss financial firm Credit Suisse.

Conclusion

The wave of de-dollarization in emerging economies is mainly due to several factors:

1. The economic sanctions imposed by the United States on other countries send the world the message that they should be wary of using the U.S. currency and seek other alternatives to protect their interests.
   
2. U.S. monetary policy deviates from international macroeconomic policies and aligns with national economic interests, which is incompatible with the global currency status of the U.S. dollar. Some emerging countries need more tools and channels to protect themselves against the Fed’s monetary policy, and confidence in the U.S. dollar has declined. In addition, the U.S. government has imposed financial sanctions on other countries by taking advantage of the U.S. dollar’s status as an international reserve and circulating currency. Using the U.S. dollar as a “soft” weapon is a fundamental reason for the trend toward de-dollarization.
   
3. With the relative weakening of the geopolitical status of the United States and the growing demand of other economies for currencies other than the dollar, the position of the U.S. dollar as the world’s reserve currency tends to weaken.
   
4. The status of the U.S. dollar in the world monetary system has declined in recent years, although its hegemonic position is still difficult to shake in the short term. 
   
5. In the future, the trend toward de-dollarization may be accompanied by slow fluctuations in the evolution of the global economic structure. This trend will exist for a long time. In recent years, the financial volume of emerging market countries has continued to increase, and the global economic structure shows a trend toward diversification. 
   

Thus, the influence of currencies such as the euro, the Japanese yen, the Chinese yuan, and bitcoin as a decentralized financial system is increasing. Against this backdrop, the global monetary system demonstrates a trend toward diversification.