Most countries are used to storing part of their currency reserves in US dollars, which are widely used in international trade. But the tide may be turning, according to economist Nouriel Roubini, nicknamed “Dr. Doom” for predicting the collapse of the housing bubble in 2008. For several months now, Roubini has been appearing in several media outlets to assert that the reign of the dollar is soon to come to an end. Zoltan Pozsar, managing director of Credit Suisse’s investment strategy and research department, also spoke out on this subject in March, saying that “a new world monetary order is emerging”.
For his part, Simon Harvey, head of FX analysis at Monex Europe, is cautious, saying that de-dollarisation should only affect countries that do not want to be subject to Western financial influence. This represents only a small part of global trade and financial integration outside of China.
If China chose to de-dollarise completely, it would have to rethink its economic structure.
Phenomenon in progress
For countries like China, de-dollarisation is not an easy task, says Harvey. “If China chose to de-dollarise completely, it would have to rethink its economic structure. Indeed, years of excessive output growth and underinvestment in other sectors of the economy have resulted in a huge net international investment position, a position that can only be absorbed by US capital markets.” Thus, China would either have to rebalance its economy to stimulate a current account deficit, and therefore, open its capital markets more to foreigners to finance, or find alternative investments to put its stock of savings.
Consequently, Harvey concludes that the role of the dollar in international finance is less threatened than some commentators suggest. However, he does observe a phenomenon of “currency weaponisation”: “IMF data shows that the share of global reserves denominated in US dollars has fallen from 65.46% in the first quarter of 2016 to 59.79% in the third quarter of 2022, a level not seen for 25 years.”
The reduction in the use of the dollar in trade and currency reserves began in the early 2000s. “The reason for this is that there has been an increase in trade with Europe and an increase in the prevalence of the euro as a currency of exchange, simply because of the size of the economy and the actual use of the euro,” observes Harvey. It is a trend that has accelerated in recent years with the issuance of common debt by the European Union.
The rise of the renminbi and the euro as credible alternatives deserves particular attention.
Sanctions effect
Since 2014, with the imposition of Western sanctions following Russia’s annexation of Crimea, the trend towards de-dollarisation has accelerated, particularly in parts of the world such as China, Russia, Saudi Arabia and the Middle East. Harvey points out that this is due to polarised economies seeking to reduce their exposure to US sanctions. “We are seeing these previously very dollarised economies potentially turning away from trading in dollars and using US capital markets, but also looking for other ways to store reserves so that they can actually be accessed in a timely manner where they need to be accessed.”
Despite this trend, Harvey believes it is unlikely that the dollar will lose its place as the world’s reserve currency in the near future, but he says that “the rise of the renminbi and the euro as credible alternatives deserves particular attention”.
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. . Read the French version of this article on the site.