De-dollarization: Alternative assets that attempt to replace the US dollar

The US dollar is the most widely used reserve currency in the world.
CFOTO/Future Publishing/Getty Images

  • Amidst the debate over de-dollarization, countries are lining up reserve currencies for trade and payments.
  • Sanctions against Russia sound like a cautionary tale about the power wielded by Washington – and the US dollar.
  • The Chinese yuan, gold, bitcoin, the euro and the BRICS common currency aim to take away the supremacy of the US dollar.

The dollar is not going away, but other asset classes are slowly waning in their dominance.

The US dollar is the world’s highest reserve currency – by far.
CFOTO/Future Publishing via Getty Images

The US dollar has been the world’s reserve currency since World War II, playing an important role in world trade.

But nations globally are now working to create reserve currencies for trade, as sanctions imposed on Russia over its invasion of Ukraine have led some prominent world leaders and businessmen to issue a warning about the power Washington – and the US dollar – wields.

Sanctioned countries like Russia and emerging countries like Argentina have recently started using the Chinese Yuan for trade, primarily with China.

Despite this, there is no indication that the dollar’s dominance can fade in the foreseeable future, simply because the currency is an integral part of the global economy, Insider’s Jennifer Sohr reported on May 6.

The dollar is by far the world’s most widely circulated reserve currency – meaning a large amount of foreign currency held by central banks and major financial institutions for use from investments to payments.

In 1999, more than 70% of the world’s foreign exchange reserves were held in US dollars.

But that proportion is declining — the dollar’s share of global foreign exchange reserves fell below 60% in the fourth quarter of 2021, the IMF said, in a June 2022 blog post.

And although the lion’s share, or 54%, of global foreign exchange reserves was accounted for in the fourth quarter of 2022, there was a decline in the dollar’s share of the total foreign reserve pie, according to IMF data.

But this does not mean that America’s strategic competitors – such as China – will not stop challenging American hegemony. Even alternative currencies such as the Swedish krona, South Korean won, and Australian and Canadian dollars have been shrinking the dollar’s share.

Read more about five assets trying to topple the dollar’s hegemony.

1. Beijing has big ambitions for the Chinese Yuan.

The Chinese Yuan is used in some trade with sanctioned countries such as Russia.

The most well-known competitor to the US dollar is the Chinese yuan – as Beijing has been trying to increase international adoption of its currency for years.

Last year, China was paying for nearly all of its Russian oil imports in its own currency to counter sanctions against Moscow over the Ukraine war.

“It is clear from moves by China, such as paying for almost all Russian oil imports in yuan or working with Brazil for yuan-denominated trade, that China does not want its currency to remain domestic,” said Abshur Prakash, president of The Geopolitical Business, a consulting firm. Based in Toronto, per Insider.

He added that controlling the currency needed by the entire world increases the strength of the nation.

However, the current discussion about the yuan as the main reserve currency revolves more around geopolitical tensions and China’s economic strength than the actual usefulness of the yuan as a reserve currency, wrote Rory Green, chief China economist at London-based consultancy TS Lombard, in an April 28 note viewed. by Insider.

“It is important to differentiate between the increasing international use of the renminbi and de-dollarization,” Green added. He referred to the yuan by its official name, the renminbi, or renminbi.

Quite simply, the yuan is constrained – mostly because its value is still managed by Beijing.

In March 2023, the yuan accounted for just 2.3% of global payments via SWIFT, the global financial messaging system used by banks. In contrast, approximately 42% of all payments were made in US dollars.

2. Gold returns as a store of value.

Gold prices rose amid the movement to remove the dollar.
Philograph / Getty Images

Central banks have been buying gold – a traditional store of value – amid the global debate over de-dollarization.

“This geopolitical turmoil is not going away,” Karen Carniol-Tambor, chief information officer for investment management firm Bridgewater Associates, said at a conference last Tuesday.

There is “slow-moving secular support for gold,” she said, according to Kitco News.

The decline in the value of some emerging market currencies – such as the Argentine peso – has also stimulated these countries to seek alternative assets for their reserves, such as gold.

Just this month, the Central Bank of Zimbabwe certified gold to support the first sale of its digital currency, the digital Zimbabwe dollar. The country wants to ease demand for dollars after its fiat local currency, which was not pegged to the US dollar, fell in 2019.

“The oldest and most traditional asset, gold, is now a vehicle for a central bank revolt against the dollar,” Rushir Sharma, chairman of Rockefeller International, wrote in the Financial Times last month.

In the first quarter of 2023, central banks accounted for 228.4 tonnes of gold added to global reserves — a 176% increase from last year, according to the World Gold Council, an industry organization.

This followed a year of record gold purchases by central banks in 2022 as institutions cut 1,136 tonnes of the yellow metal, the council wrote in a February 2023 report.

3. Digital currencies and cryptocurrencies are looking forward to a slice of the USD pie.

Digital currencies like bitcoin are also contenders for dollar dominance.
Image by Getty Images

Digital currencies, including cryptocurrencies such as Bitcoin, are another asset class vying for the dollar’s position.

The Chinese yuan was issued in digital form, sparking debate about de-dollarization even in 2021 when it was still in public testing.

The digital yuan is “a key component of an alternative to the dollar-based system that Beijing is building,” Diana Chuileva, chief economist at Enodo Economics, told the Nikkei in August 2021.

Other than geopolitical rivalry, settling cross-border payments in digital yuan may be cheaper and easier than a dollar-based system — boosting its use internationally, Chuileva told the media.

The digital yuan is gradually being rolled out in China, with the eastern city of Changshu recently starting to pay public servants’ salaries in the currency.

Even Zimbabwe launched a digital Zimbabwe dollar just this month, backed by gold.

Meanwhile, emerging nations El Salvador and the Central African Republic have adopted bitcoin as their official currency. El Salvador has even added bitcoin to its national reserves.

“If this trend takes hold, it could lead to a redistribution of leverage power away from the largest states and their ability to expand their budgets at will,” writes Andy Yee, industry fellow at University College London’s Center for Blockchain Technologies. Posted on the University of Hong Kong’s Asia Global Institute website on May 11.

4. The euro is already the second most reserve currency in the world.

The euro is already one of the highest reserve currencies in the world – at least one European leader is
Owen Franken / Getty Images

While the European Union and the United States are allies, it has not stopped the European Commission’s ambition to promote the use of the euro in international payments and challenge the dollar.

This is evidenced by a proposal in 2018 to strengthen the role of the euro after former US President Donald Trump unilaterally pulled the US out of the Iran nuclear deal.

The bloc’s aggressive stance has since subsided, but recent comments from major EU economies point to the bloc’s tensions and rivalry with its most important ally.

French President Emmanuel Macron has warned against “the US dollar’s territorial overreach,” suggesting in an April interview with Politico that Europe should reduce its dependence on the dollar.

But the euro is far from overtaking the dollar as the world’s reserve currency.

The single currency accounts for 20% of global foreign exchange and international debt – second only to the dollar’s share of the pie, according to the European Central Bank.

“However, there is no other currency with the recognition, stability, and economic strength behind it,” Westact, a South African money manager, said in a note to clients, per Bloomberg on May 10. The only currency vaguely close to being able to replace the dollar is the euro. “.

5. The emerging BRICS countries aspire to a single currency.

Leaders of the BRICS nations — Chinese President Xi Jinping, Russian President Vladimir Putin, former Brazilian President Jair Bolsonaro, Indian Prime Minister Narendra Modi and South African President Cyril Ramaphosa — at the BRICS summit in Osaka, Japan, on June 28, 2019.
Sputnik/Alexei Nikolsky/The Kremlin via Reuters

A group of emerging nations including Brazil, Russia, India, China and South Africa called the BRICS also pressed for a single currency.

While Russian President Vladimir Putin broached the idea as early as June 2022, the concept has started to gain traction again recently amid the de-dollarization debate.

“Why can’t we trade based on our own currencies?” Brazilian President Luiz Inacio Lula da Silva said during a state visit to China in April, according to the Financial Times.

“Who decided that the dollar should be the currency after the disappearance of the gold standard?” he added.

The BRICS group will discuss the common currency “properly” at the August meeting of the bloc’s leaders in Johannesburg, Naledi Pandu, South Africa’s Minister of International Relations and Cooperation told Bloomberg in an interview on May 9.

It’s not entirely clear what the BRICS countries envision for their common currency, but it could be a rival to the International Monetary Fund’s US-dominated Special Drawing Right, or SDR, an international reserve asset based on a basket of five currencies: the US dollar, euro, Chinese yuan and Japanese yen. and the pound sterling, according to the International Monetary Fund.

The single BRICS currency will help enhance the geopolitical influence of the group of major emerging countries.

“Why do the BRICS countries need an SDR-like basket currency? One cannot help but think that this is a move to address the perceived US dominance of the IMF, and will allow the BRICS countries to build their own sphere of influence and currency unit within this sphere,” wrote Chris Turner, president of Dutch bank ING Global Markets in a note on June 2022.

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