Source: AFP
Source: AFP
Talk of de-dollarisation – or reducing a country’s reliance on the USD -- is in the air. To some extent, concerns of the USD losing its global reserve currency status typically correspond with USD weakness. There are questions as to whether the weaponisation of the USD via sanctions on Russia’s reserves could have hastened other countries to reduce their overreliance on the currency by diversifying into gold. Increased use of the CNY for bilateral trade and speculation about CNY commodity trading have also added to de-dollarisation concerns.
Source: BIS, Bank of Singapore.
There has been a move toward a less-dominant USD world – but at a pace that remains very gradual. Talk of USD’s demise is greatly exaggerated. Most currencies are only used domestically or in cross-border transactions that directly involve the currency’s issuer. But as shown in the chart above, the USD is still widely used for global funding, trade and payments, and cross-border borrowing and lending even when the US is not involved. This disproportionately large reliance on the USD is in spite of the US accounting for just over 10% of global trade.
The USD's share of USD12tn global reserves has declined gradually over the past 20 years as central banks diversified their holdings. But at 58% of total global reserves, the USD’s share is still nearly twice that of the EUR, GBP, JPY and CNY combined. Reserve trends go in cycles. Over the past decade, most of the decline in the USD’s reserve share has been a consequence of: (1) the reach for extra returns in currencies like the AUD, CAD and CNY in a low-yield world or (2) developments in technology that have benefitted currencies like the KRW, SGD, SEK and NOK.
Note: Share of global allocated foreign exchange reserves at current exchange rates
Source: IMF, Bank of Singapore.
The USD’s reserve status is likely to remain well-entrenched for the foreseeable future. It is tough to identify a serious challenger that can rival the fundamental underpinnings for the USD’s reserve status: deep, liquid and open capital markets, solid property protections, a large economy and a strong financial system, notwithstanding recent banking sector problems. The EUR is not a viable alternative because of Europe’s fragmented capital markets while China’s goals to internationalise its currency conflict with the capital controls on the CNY. Gold is a good store of value but its liquidity and use as a means of exchange are far more limited, and crypto currencies are not viable alternatives because they are speculative assets.
Sanctions may push some countries away from the USD, but it is not clear where they will turn to, especially if these sanctions are broadly supported by the world’s developed countries.
We expect medium-term USD weakness - but driven more by a dovish Fed pivot in early 2024 rather than the USD losing its global appeal. The shift in the economic outlook, which is making the US look un-exceptional relative to the rest of the world, is set to weigh on the USD outlook.
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