De-Dollarisation in Global Finance

The Trend of De-Dollarisation

De-Dollarisation refers to the efforts by various countries and regions to reduce the reliance on the US Dollar in international trade and finance. Historically, attempts at de-Dollarisation were limited, but recent multi-pronged efforts indicate a shift in global sentiment.

The US Dollar holds a dominant position in cross-border trade and finance, especially in many emerging markets where it is not the official currency. It is often preferred for its stability and wide acceptance, being commonly used for pricing exports, imports and external debts in these regions.

However, discontent over the Dollar’s supremacy has become more widespread, emanating mostly from the regions of Southeast Asia, the Middle East and Latin America. The predominant transformation in current de-Dollarisation efforts, as opposed to those previously, is the explicit enclosure within the policies and strategies of international players.

De-Dollarisation has a strong economic rationale. Specifically, the shares of US Dollars in international foreign reserves, global trade invoicing, international debt securities and cross-border loans are many times greater than the United States’ shares of global gross domestic product (GDP) and international trade. Consequently, there is an asymmetry between the size and global importance of the US economy compared to the global role of the US Dollar.

Over the last two decades, numerous central banks worldwide have sought to diversify their reserves away from the US Dollar. This effort has led to a decline of over 10 percentage points in the Dollar's share of global foreign-exchange reserves since the year 2000.

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Is gold the alternative? Or are there other options?

Since the start of 2022, central banks from across the globe have been stockpiling record amounts of gold. Throughout that year, monetary authorities across nations bought an unprecedented 1,083 tons of the commodity, with the aim of diversifying their reserves, improving their balance sheets and gaining liquidity from an asset without additional credit risk.

However, the increased stockpiling of gold has also been linked to the trend of de-Dollarisation. Notably, some countries are simply looking to diversify while the US deals with challenging macroeconomic conditions at home. However, recent sanctions imposed by the US using the SWIFT system (specifically to Iran and Russia) have spurred further interest in gold as a hedge against multilateral sanctions.

Besides gold, countries have also been promoting their own currencies in international transactions. Data from FXC Intelligence reveals that while de-Dollarisation is indeed occurring, it's not solely a shift to a single currency and is expected to progress gradually over decades. In tandem with the Dollar's share of global foreign exchange reserves declining by approximately 6% since 2016, various other currencies (including the Canadian Dollar, Japanese Yen, and British Pound Sterling) have been adopted for diversification towards multi-currency reserves. This nuanced strategy contrasts the interpretation that de-Dollarisation will be a swift transition to any single currency. Nonetheless, one currency remains prominent in the de-Dollarisation discussion.  

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The Role of BRICS and BRICS Invitees

In the currency conversation, the aim of BRICS, at least initially, has been to increase the use of local currencies across the global economy. However, from a long-term perspective, the objective is to replace the US Dollar with the "R5," comprised of the currencies of the founding BRICS members: the Chinese Renminbi, the Russian Ruble, the Indian rupee, the Brazilian Real and the South African Rand. This initiative is referred to as “alternative financial plumbing”, which alongside the introduction of central bank digital currencies (CBDCs), would significantly reduce US influence in the global financial system.

For example, India is actively promoting the use of its currencies, the Rupee, in cross-border trade and finance. However, challenges such as concerns over Rupee convertibility and volatility hinder its adoption, particularly in trade with Russia. Similarly, Brazil and South Africa face obstacles like currency volatility and the size of their economies, limiting the global growth of their currencies for international transactions.

Consequently, changes in the share of cross-border payments made in other BRICS members’ and BRICS invitees’ local currencies have been relatively smaller in comparison to the Chinese Renminbi.

Notably, the Renminbi's use has expanded due to Chinese involvement in cross-border transactions and trade payments with Russia. The growth of Renminbi usage is facilitated by Renminbi clearing banks, People's Bank of China swap lines and the Chinese Cross-Border Interbank Payment System (CIPS), which enhances the efficiency of Renminbi transactions globally (comparably with SWIFT).

Furthermore, recent developments, such as Brazil's first Renminbi clearing bank and Russia's increasing participation in CIPS, suggest further growth in Renminbi usage across BRICS countries and beyond. These initiatives extend to Argentina, South Africa, Egypt, and Saudi Arabia, which highlight efforts to increase Renminbi usage for oil payments and trade settlement.

Hence, the Renminbi is by far the most commonly used BRICS currency. A variety of policy efforts in 2023 involving BRICS countries and recent BRICS invitees signal Beijing’s aim to further grow the currency’s global use in the near future.

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The Anticipated Impact of De-Dollarisation

Primarily, de-Dollarisation could lead to a broad depreciation and underperformance of US financial assets. Equities may therefore suffer from divestment or reallocation away from US markets, causing negative returns and loss of confidence. According to Lisa Shalett, CIO of Morgan Stanley Wealth Management, “a broader decline in the Dollar would consequently impact US stocks through earnings multiples, which have largely fuelled the market's recent gains”.

Additionally, there could be upward pressure on real yields due to divestment within US fixed income. In turn, the US may experience reduced foreign investment and potentially even inflationary pressures.

Beyond the US markets, de-Dollarisation might lead to heightened exchange rate volatility, especially owing to having over sixty currencies pegged to the greenback. The Dollar's influence on oil prices would also be expected to diminish further. Recently, more oil sales are conducted in non-Dollar currencies, such as the Renminbi, especially by countries such as Russia and Saudi Arabia. The Dollar's impact on oil prices has significantly decreased since 2014, with OECD oil inventories playing a more dominant role. Considering the recent BRICS membership expansion with traditional US allies, such as Egypt, Saudi Arabia and the UAE, complete de-Dollarisation in oil markets (and indeed, other global markets and industries) could happen at a more expedited timeline than expected.

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Complete or Partial De-Dollarisation?

While some scale of de-Dollarisation is anticipated, the rapid abandonment of the US Dollar is quite unlikely. The enduring advantages of a widely accepted currency, coupled with the US's global alliances, mitigate against quick change.

The notion of partial de-Dollarisation, where the Chinese Renminbi gradually takes on some of the Dollar's functions is a more feasible scenario. This shift could foster regionalism, leading to distinct economic and financial spheres of influence with diverse currencies and markets playing pivotal roles.