The end of King Dollar? The forces at play in de-dollarisation
By Naomi Rovnick and Libby George
May 25, 20235:19 PM GMT+8Updated 4 hours ago
BUT TOO COMPLEX A SYSTEM
De-dollarisation would require a vast and complex network of exporters, importers, currency traders, debt issuers and lenders to independently decide to use other currencies. Unlikely.
The dollar is on one side of almost 90% of global forex transactions, representing about $6.6 trillion in 2022, accordingto BIS data.
About half of all offshore debt is in dollars, the BIS said, and half of all global trade is invoiced in dollars.
The dollar’s functions “all reinforce each other”, said Berkeley economics and political science professor Barry Eichengreen.
“There just isn’t a mechanism for getting banks and firms and governments all to change their behaviours at the same time.”
A FRAGMENTED FUTURE
While there may not be a single dollar successor, mushrooming alternatives could create a multipolar world.
BNY Mellon’s Yu said nations were realizing that one or two dominant reserve asset blocks was “just not diversified enough.”
Global central banks are looking at a wider variety of assets, including corporate debt, tangible assets such as real estate, and other currencies.
“This is the process that is underway,” said Mark Tinker, managing director of Toscafund Hong Kong. “The dollar is going to be used less in the global system.”
AN UNSHAKEABLE BASIS
Because large bank deposits are not always insured, businesses use government bonds as a cash alternative. The dollar’s status is therefore underpinned by the $23 trillion U.S. Treasury market – viewed as a safe haven for money.
“The depth, liquidity and safety of the Treasury market is a big reason why the dollar is a leading reserve currency,” said Brad Setser, a Council on Foreign Relations fellow who tracks cross-border currency flows.
International holdings of Treasuries are vast and there’s no credible alternative yet. Germany’s bond market is relatively small, at just over $2 trillion.
Commodities producers may agree to trade with China in yuan, but recycling cash into Chinese government bonds remains tricky due to difficulties opening accounts and regulatory uncertainty.
“But you can hop on an app and trade Treasuries from anywhere,” Natwest Markets emerging markets strategist Galvin Chia said.