De-dollarization could reduce institutional, investor and corporate demand for the dollar over time, and its size could cause its value to fall. If there is a specific catalyst for this move, de-dollarization could also result in increased exchange rate volatility, especially since more than 60 currencies are pegged to the dollar.
However, while some signs of de-dollarization are emerging in currency markets, so far the dollar continues to maintain its dominance. “Overall dollar usage has declined, but remains within long-term ranges and its share remains elevated compared to other currencies,” said Meera Chandan, co-head of JP Morgan’s global currency strategy research team.
If currency volumes are analyzed, the dollar’s share stands at 88%, close to record levels, while its share in trade turnover, cross-border liabilities and debt issuance in foreign currency has remained stable over the last few years. Two decades. “The dollar’s transactional dominance remains best-in-class despite secular declines in U.S. trade stocks. On the other hand, de-dollarization is evident in foreign exchange reserves, where the dollar’s share has declined to an all-time low of 58%,” Chandan noted.
What currencies could dethrone the dollar? “In terms of competitors, China has been trying to internationalize the renminbi. However, the renminbi’s global footprint remains small despite growing every year, and this will be a long process that will require reforms,” Chandan said. For example, the renminbi accounts for only 2.3% of SWIFT payments, compared to 43% for the dollar and 32% for the euro.
“Given China’s growing centrality to global trade, one might naturally expect the renminbi to take on a larger role in the global economy over time, but this transition would likely occur over the course of decades,” Wise added. “Relaxing capital controls, opening markets, implementing measures to promote market liquidity, strengthening the rule of law, reducing appropriation and regulatory risk, and promoting Chinese government bonds as an alternative safe asset – all of this could consolidate to China and the renminbi as a credible alternative. to the United States and the dollar.”