黑料社区

By Sangita Gazi and Christabel Randolph

, International Monetary Fund (IMF) states that 鈥榌t]he dollar鈥檚 share of global foreign-exchange reserves fell below 59 percent in the final quarter of last year, extending a two-decade decline鈥�. However, surprisingly, the decline in the dollar is not associated with the 鈥榠ncrease in the shares of the pound sterling, yen, euro, and other long-standing reserve currencies.鈥� Instead, the shift in the dollar鈥檚 share in the reserve currency system went in two directions鈥攁 quarter into the Chinese renminbi and three-quarters into the currencies of smaller countries that have historically played a limited role as reserve currencies. This piece examines the shifts underlying this trend with a focus on increased regional alliances in trade and payment systems technology. We conclude with forecasts and implications for a more multipolar monetary order and 鈥榙ollar diplomacy.鈥�

Since the onset of the Covid-19 pandemic, geopolitical tensions and economic stagnation have led to fragmentation in cross-border trade and payment systems. The ongoing Ukraine-Russia conflict and international sanctions imposed by the Western economies have also contributed to this situation by causing disruptions for countries with trade relationships with Russia, particularly for essential commodities like fuel, grain, and oilseed. Moreover, many countries are running low on U.S. dollar reserves amidst inflation, prompting them to consider alternative currencies for cross-border trade settlements. This is further exacerbated by the aggressive rate hikes by the Federal Reserve in an attempt to contain domestic inflation within the U.S. The historical correlation between the U.S. dollar and commodity prices has been disrupted for the first time. As a result, evidence suggests a degree of regional fragmentation in trade-related activities and the use of alternative currencies, leading to a shift away from the U.S. dollar as the primary currency for international trade. For instance, in March 2023, the yuan was the most widely used global currency, surpassing the U.S. dollar and euro.

Further, central banks from emerging markets and developing economies seek to diversify their foreign currency reserve composition. The shift began in April 2022, after key Russian banks were removed from SWIFT following Russia鈥檚 invasion of Ukraine. China increasingly uses the yuan to buy Russian commodities, such as oil, coal, and metals, settling their bilateral trade with Russia in Chinese currency instead of dollars. In a similar effort, India has made several initiatives to create bilateral trade relationships with countries like Bangladesh, the United Arab Emirates, and Malaysia to internationalize the rupee and use it to settle cross-border trades. This trend toward exploring alternative currencies may affect the global financial landscape. Still, its impact about newer currencies鈥� volatility and regulatory systems.

The Trends of De-Dollarisation and Underlying Reasons

Low dollar Reserve

The trend of dollarisation is the culmination of multifaceted socio, economic and geopolitical factors. Following the abandonment of the gold standard in 1971, the U.S. dollar has become the most prevalent foreign currency reserved by developing economies. The dollar reserve portfolio is seen as a measure of a country鈥檚 economic health and power. Two main factors have shaped the current dollar-based trade and cross-border payments system. First, the majority of global energy transactions are conducted in dollars. For instance, the oil trade involves billions of dollars every day, and since every country requires energy, this leads to a high demand for dollars in the foreign exchange market. Second, the U.S. dollar has become the most credible medium of exchange for cross-border trade settlements. Until 2019, the dollar accounted , 74 percent in Asia, and 79 percent across the globe. However, since the covid-19 pandemic, the swirl of stagnant economic growth worldwide and geopolitical tensions have created dilemmas for emerging economies as they face trade deficits and low U.S. dollar reserves.

In 2021, the IMF reported that 鈥渢he share of U.S. dollar reserves held by central banks fell to 59 percent鈥濃��– primarily driven by short-term exchange rate fluctuations and central banks鈥� action towards diversifying their foreign currency reserves. For many developing countries, more import demands and a downward trend in remittance have been causing the depletion of foreign exchange reserves. Moreover, for developing countries, the rising interest rates in the United States and the appreciation of the U.S. dollar , debt servicing, and borrowing costs, undermining the prospects of their full economic recovery. Under these circumstances, many developing countries depreciated their currencies against the U.S. dollar, such as the Argentine Peso, the Pakistan rupee, the South African Rand, the Indian rupee, and the Indonesian rupiah. To slow currency depreciation, many central banks in emerging economies have been selling their foreign exchange reserves, contributing to the depletion of overall dollar reserves in the world, thus, seeking to use alternative currencies for international trade settlements.

Outbreak of Ukraine-Russia War and international sanctions

The de-dollarisation process has been hastened due to the outbreak of the Ukraine-Russia war and the imposition of economic sanctions on Russia. Following SWIFT鈥檚 ban on Russia, it has been exploring opportunities to establish bilateral trade relationships with various countries involving payment in rubles instead of dollars, partially or fully. For instance, Turkey has agreed to pay for its gas imports from Russia in rubles. Additionally, Turkey has confirmed that five of its commercial banks would use the Russian Mir payment system, enabling Russian tourists in Turkey to use their currency. As part of its efforts to reduce the dollar hegemony and shift to alternative currencies, the Moscow Exchange in Russia has begun offering bonds denominated in Chinese yuan. The international sanctions and weaponisation of SWIFT against Russia have overarching geo-political implications for emerging economies. For countries with strong trade relationships with Russia, the sanctions by the West and SWIFT have created a significant trade barrier, given the rising export costs. As an alternative, developing countries actively try to resort to alternative currencies and use different payment systems to facilitate cross-border payments and settlements. For instance, during 2022, total settlements on the Cross-Border Interbank Payment System (CIPS), China鈥檚 alternative to the SWIFT international payment system, rose 21.5% year-on-year to 96.7 trillion yuan in 2022.

Internationalisation of currencies

In the wake of increasing geo-political risks and the changing economic dynamics, from China, India, and Brazil to redesign the economic order by using their currencies in global trade while cutting the US dollar. Given its dominant position in international trade and the rapid digitalisation of its currency and payment systems, China is among the most active players in this endeavour. Similarly, India has been actively advancing its foreign trade agenda by promoting the use of the rupee in international transactions. As part of its 2023 policy on foreign trade, India has prioritized using the rupee, with neighbouring countries like Bangladesh opting to settle bilateral trade transactions in their respective currencies – the taka and the rupee. Malaysia has also agreed to engage in trade with India using the rupee, while India and the UAE are currently working on an agreement for a rupee-dirham payment mechanism. The central banks of both countries have signed a Memorandum of Understanding to enhance collaboration in financial services, particularly in exploring the interoperability between their respective digital currencies.

Long-term implications on geo-politics and global economy

India鈥檚 offering of the rupee as an alternative currency for international trade settlements is positioned as a mechanism of 鈥樷�� exchange risk primarily based on the dollar. This narrative has longer-term implications as it signals the fragility of the U.S. economy, political processes, and foreign policy. The panic-induced shifting to alternative trading and reserve currencies begs a broader question of whether a dollar hegemony is sustainable or whether this signals a more multipolar global monetary order. The long-term implications of the current trend of de-dollarisation can be assessed in light of a combination of factors:

Firstly, the current de-dollarisation trend is not just one motivated by the necessity of mitigating exchange rate shocks. Instead, it is one of opportunistic competition between regional powers to consolidate economic and political power 鈥� a trend that will likely accelerate. This acceleration will likely be fuelled by emerging economies where governments pursue public policy goals of quick economic development and retaining populist support.

Secondly, of Western democracies, particularly the U.S. and its allies, increasingly focus on Russia and China, leading the fastest-growing economies in the global south to reject divisiveness and that yield better Coasean bargains. According to the report published in May 2023 by the U.S. Department of Agriculture, during 2022-23, despite the international sanctions. Two countries that have substantially are NATO member Turkey, which has seen trade with Russia surge 93 percent, and US partner India, whose trade has ballooned by nearly 250 percent since 2021. Governments in Asia-Pacific, Latin America, and Africa have been forging regional alliances and setting-up institutional arrangements, most notably on trade, data, trade, and payment systems. Trade-based alternative currencies will likely proliferate further as the U.S. expands its protectionist measures by locking-in supply chains under the and tightening scrutiny under .

Thirdly, Western governments have a blas茅 attitude towards leveraging technology to redefine global payment systems, focusing more on supplementing security measures of entrenched institutions. This ignores the sustained efforts of China to like CIPS. Smaller emerging economies like Bangladesh that cannot wait on a resolution of Western conflicts for development or infrastructure projects have leveraged not just alternative currencies but are evaluating the prospects of newer global financial technology systems to continue cross-border payments.

To be clear, amidst the alarming cries of de-dollarisation, the narrative also has its fair share of scepticism. The most apparent and common-sense response is that no currency can singularly replace the dollar. Around 60% of global trade invoicing is settled in the U.S. dollar while using the . Examined every quarter, 鈥淸t]he U.S. dollar accounted for in the fourth quarter last year鈥�, according to data from the IMF鈥檚 Currency Composition of Foreign Exchange Reserves (COFER). Comparatively, the euro is a distant second, while the Chinese yuan accounted for just 2.7% in the same period.鈥� The current de-dollarisation trend is not merely a one-dimensional response or retaliation to the U.S. and Group 7 sanctions on Russia but an outcome of the U.S.’s sluggish and divisive economic and technological statecraft. 

鈥楧ollar Diplomacy鈥� is contingent on the robustness and stability of internal administration, agility in integrating technology in financial infrastructure, and uncomfortable alliances – a craft in which the U.S. is losing ground.

Sangita Gazi is聽a Ph.D. researcher in law at the University of Hong Kong and a research fellow at Yale Law School. She writes extensively on the convergence of law, finance, and technologies, particularly from the Global South鈥檚 perspective. Sangita’s X handle is @. 聽

Christabel Randolph is Public Interest Fellow at Georgetown University Law Center and a Law Fellow at the Center for AI and Digital Policy (CAIDP). At CAIDP she leads聽the legal group’s work on governance of artificial聽intelligence, machine learning technologies, privacy and digital mediums in the United聽States. Christabel鈥檚 X handle is @.

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