Dollar's clout waning on financial stability woes

Diversifying from greenback helps create multipolar global currency system, say experts

For Michael Xu, a sales veteran with 12 years of experience in automobile exports, one of the most evident industry trends over the past year has been the falling use of the US dollar in settlements with his overseas clients.

Xu's company, a Chinese automaker with overseas revenue taking up a quarter of total sales, received half of its overseas revenue in dollars in April, down from 60 percent last year.

"The share of dollar payments fell as we have shifted our focus of sales to certain countries in Europe and Asia, where clients are inclined to pay in renminbi instead of the dollar," Xu said.

His observation is not unusual. In March, the renminbi overtook the US dollar as China's most used currency in cross-border payments and receipts for the first time, as the yuan's share hit 48 percent while the greenback's share declined to 47 percent, according to Bloomberg.

Globally, the tide of "de-dollarization" — which refers to declining reliance on the dollar as the dominant international currency — also appears to be gaining traction.

According to Google Trends, an index that provides access to a sample of search requests made to Google to gauge the popularity of search terms, global interest in the term de-dollarization surged from 0 at the end of last year to 19 in April, the highest level since 2006.

Some experts feel the use of the US currency as both a financial weapon and sanctions tool — which has shaken the world's trust in the greenback — is one of the primary reasons for the de-dollarization wave.

Following the outbreak of the Russia-Ukraine conflict, $300 billion out of $640 billion that Russia had in its gold and foreign exchange reserves were frozen in March 2022, as part of the sanctions imposed by the United States and its allies.

The sanctions have not only resulted in a falling use of the dollar in Russia — the share of the dollar/rouble pair's trading on the Russian exchange market fell to a multi-year low of 34 percent in March, dethroned by the yuan/rouble pair's 39 percent — but prompted a rising number of countries, including major commodity exporters, to reduce their dollar exposure.

Notably, top leaders of Cuba and Brazil have both called for cutting dependence on the dollar, after Saudi Arabia indicated its openness to trading in currencies other than the greenback for the first time in 48 years.

Alternatives to the dollar are being sought. BRICS members, comprised of Brazil, Russia, India, China and South Africa, are considering creating a new currency to settle cross-border trade, while Russia and Iran are in talks over a plan to launch a new cryptocurrency backed by gold, according to news reports.

The US Federal Reserve's aggressive interest rate hikes to combat inflation also contributed to the de-dollarization tide by tightening dollar liquidity. Amid falling dollar reserves, Argentina has shifted from the US dollar to the renminbi for all settlements of imports from China starting from May.

The US banking crisis burst out in March and the US debt ceiling issue that unnerved financial markets in May have further fueled the de-dollarization sentiment, raising questions over the stability of the US financial system and the greenback's ability to provide safe assets.

With the US president having signed a bill on June 3 that suspends the US government's $31.4 trillion debt ceiling, market jitters over any near-term US government default have eased. Yet, experts noted that rising US debt could still endanger investor confidence in the dollar over the long term.

"The size of US government debt has surged from about $10 trillion in 2008 to $31.4 trillion now, and is likely to further expand," said Zhang Liqing, director of the Center for International Finance Studies, which is part of the Central University of Finance and Economics.

"This will severely affect investor confidence in the long-term stability of the dollar's value," Zhang said at a seminar held by the China Macroeconomy Forum.

As multiple factors eroding confidence in the dollar converged — ranging from fears that the currency may be further used as a weapon in intensified geopolitical tensions to concerns over the stability of its intrinsic value — the shift to a less greenback-dependent world is set to continue, experts said.

The dollar's global status comes at the expense of a higher external debt burden, which could ultimately trigger a crisis of confidence in the currency itself and accelerate the move to a multipolar world, according to analysts at Moody's Investors Service.

"The US dollar's share of central banks' currency reserves may continue to shrink in the years to come," Pictet Wealth Management, a Swiss firm, noted in a recent report.

The report identifies two primary catalysts for the trend. First, the West's freezing of Russia's foreign exchange reserves may lead to a comprehensive revision of countries' currency allocations. Second, the end of negative interest rates in the eurozone should make the euro a more worthy alternative to the dollar than it used to be.

According to the International Monetary Fund, the share of US dollar reserves in allocated official foreign exchange reserves worldwide has dropped in seven consecutive years to 58.36 percent by the fourth quarter of 2022, compared with more than 71 percent in 2000 and 58.8 percent a year ago.

While the dollar's share in global foreign exchange reserves fell, the renminbi's share has increased by 1.61 percentage points from 2016, when the IMF started to publish the currency's share, to 2.69 percent by the fourth quarter of 2022.

Over the same period, the euro's share also rose by 1.33 percentage points to 20.47 percent, while the Japanese yen increased by 1.56 percentage points to 5.51 percent.

Such a shift toward a multipolar currency system would be a boon for the global economy by curbing the negative spillovers of US monetary policy adjustments and facilitating a more inclusive development of international trade, said Cheng Shi, chief economist at ICBC International.

For instance, Xu, the auto exporter, said switching toward more local currency settlements can boost his company's sales to overseas markets that experience a shortage of dollar reserves, including some African countries, and save the cost of hedging against exchange rate fluctuations.

The rise of non-dollar reserve currencies, however, may not challenge the dollar's global dominance anytime soon, experts said.

In fact, de-dollarization is likely to slow down marginally going forward, rather than speed up, said Cheng. "The global economy and financial system are so closely intertwined with the US dollar."

Moody's analysts also said that although a more multipolar currency system is expected to emerge over the next few decades, it will still be led by the greenback because its alternatives will struggle to replicate its scale, safety and convertibility in full.

Remaining the most active currency for global payments, the dollar's share in global payments stood at 42.71 percent in April, up from 39.77 percent two years ago, according to Swift, the financial messaging services provider.

The dollar has even left the euro — the second most active currency — further behind as the difference between the dollar's share and the euro's has widened from 3.45 percentage points two years ago to 10.97 percentage points in April.

"Looking ahead, the biggest variable that would determine the competitive landscape among major international currencies may be the development of their financial systems," said Wu Liyuan, a researcher at the Chinese Academy of Social Sciences' Institute of World Economics and Politics.

While US contribution to the global economy has dropped to about a quarter now from about half just after World War II, Wu said the openness and depth of its financial system remain "irreplaceable", which provides a solid foundation for the dollar's status.

"Were any non-dollar currency to challenge the greenback's dominance, whether it is the Chinese renminbi or the Indian rupee, it would have to provide global investors with financial assets comparable to the greenback."

Liu Zhihua contributed to this story.