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.
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