- Many countries are not looking to decouple from the USD but to reduce reliance on the greenback.
- It is a response to geopolitical tensions and the need to mitigate exchange rate pressures.
- The current momentum will not unseat the USD’s role as the dominant reserve currency.
- But America has little room for complacency.
- Dedollarisation has implications for global markets in the long term.
Commentary: De-dollarisation update
In the first half of 2024, the global financial landscape witnessed an increase in the momentum of dedollarisation. Dedollarisation refers to the gradual reduction of reliance on the USD in international trade, finance, and central bank reserves. The movement is driven by various geopolitical, economic, and strategic factors by countries seeking to diversify their currency holdings and reduce vulnerability to the US monetary policy and financial and economic sanctions.
BRICS enlargement
In January 2024, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates joined BRICS. This inclusion doubled the bloc’s membership from the original five – Brazil, Russia, India and China in 2006 and South Africa in 2010. Malaysia and Thailand have expressed interest to join the grouping in June 2024.
Strategically, the expansion of BRICS reflects the countries’ desire to enhance economic cooperation and integration, diversifying trade partners, reduce reliance on traditional Western markets, and using local currency more regularly for trade.
An enlarged BRICS can develop alternative financial institutions and systems, reducing dependence on traditional institutions like the IMF and the World Bank. BRICS countries could also increase their collective influence in international forums like the United Nations and the G20, creating a counterbalance to Western alliances such as NATO and the EU, leading to a more multipolar world.
Reducing reliance on the USD and the EUR
In June 2024, the US expanded sanctions against Russia, which prompted the Moscow Exchange (MOEX) to halt USD and EUR trading and adopt the CNY/RUB as the benchmark exchange rate. The Russian central bank confirmed that the CNY became the primary currency on MOEX, accounting for 54% of transactions on the exchange.
In the Middle East, the UAE started trading with China in CNY for oil. In October 2023, China used digital RMB to settle first cross-border oil transaction for one million barrels of oil from the UAE. The UAE has expressed interest in participating in the Shanghai International Energy Exchange, where oil futures contracts are denominated in CNY. The UAE also wants to expand the Comprehensive Economic Partnership Agreement (CEPA) signed with India in February 2022 to boost trade and economic ties.
Two significant developments occurred in Saudi Arabia in June 2024. First, the kingdom’s 50-year petrodollar agreement with the US expired on June 9, leaving it open to using currencies other than the USD for its oil trade. Second, Saudi Arabia joined Project mBridge, a multi-central bank digital currency (CBDC) initiative launched in 2021 by the Bank of International Settlements in collaboration with the central banks of China, Hong Kong SAR, Thailand, and the UAE. The project seeks to ensure faster, cheaper, and more efficient transactions than traditional methods like SWIFT. It has reached the Minimum Viable Product stage, signalling a readiness for broader implementation and further development through collaboration with private-sector financial firms.
Over the past few years, ASEAN countries have entered into bilateral currency settlement agreements to facilitate using local currencies for trade. For example, Indonesia, Malaysia, Singapore, the Philippines, and Thailand have adopted a universal QR code payment system for cross-border transactions, promoting the use of local currencies. These efforts are part of broader efforts to promote financial stability and reduce exposure to global currency fluctuations.
Conclusions
Many countries are not looking to decouple from the USD but to reduce reliance on the greenback and other Western reserve currencies, like the de-risking policy pursued by the US and the EU with China. They are responding to rising geopolitical tensions, particularly between the US and Europe against Russia and China, and the resultant sanctions and trade tariffs.
The other incentive is the need to mitigate the economic and financial fallout from domestic policies of large economies. For example, many countries have been mitigating volatility in their exchange rate due to the USD’s strength, which was brought about by the Fed’s high interest rate policy to regain control of inflation.
Nonetheless, the dedollarisation process has long-term implications for global markets, trade dynamics, and the international monetary system. The rise of regional currencies and regional payment systems that facilitate transactions in local currencies supports the trend toward a more multipolar currency environment.
Overall, this year’s pickup in the dedollarisation momentum this year will not unseat the USD’s entrenched role as the dominant reserve currency in the world economy and global financial markets. According to the BIS, the USD accounts for almost 90% of global FX transactions in trade and investments, well ahead other significant currencies such as the EUR and the CNY. The IMF COFER showed the USD’s share of the world’s allocated reserves at 58.4% at the end of 2023, barely changed from 58.5% the previous year.
However, there is little room for complacency. In August 2023, Fitch Ratings became the second international rating agency to axe America’s triple-A debt rating by one notch to AA+. Fitch attributed the downgrade to the expected fiscal deterioration over the next three years, particularly the significant budget deficits lifting government levels, not helped by repeated political brinksmanship over the debt ceiling. The Congressional Budget Office (CBO) projected the US federal debt to exceed its all-time high (106% of GDP during World War II) in 2027. The IMF also expressed significant concerns over the rapid increase in US government spending and the substantial rise in the federal deficit to USD 1.7 trillion in 2023. Not surprisingly, the US fiscal situation has become a prominent topic in the upcoming US Presidential Election on November 5.
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Ma Tieying 馬鐵英, CFA
Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
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