Is the Dollar dying? Its reserve currency status may be at risk, but it isn’t time to die

• The reign of the dollar as the world’s reserve currency is under increasing scrutiny, as countries prepare ground to reduce their reliance on the whims of US’ monetary and foreign policy.
• Amongst the countries which have moved against the dollar in some capacity include Russia, China, India, US ally Saudi Arabia and Brazil.
• Economists say the dollar’s influence will slowly but steadily reduce, but its replacement might still take a while to arrive on the scene.

The world is going through an upheaval on multiple fronts, many of which lead to the US’ unchecked unipolar supremacy being challenged and by extension, the dollar’s primacy as the world’s reserve currency.

The dollar’s reserve currency status means that there is a virtually endless demand for it, allowing the US and US companies to borrow money internationally.

World trade is also undertaken overwhelmingly in dollars – according to an estimate by the Bank for International Settlements, dollars accounted for 88% of the world’s total transactions in 2022. This means that countries all over the world need to hold the dollar to be able to buy from international markets. This creates the demand for dollars and the cycle continues.

Dollar’s reserve currency status also gives the US immense economic and political clout, helping it remain the superpower.

De-dollarisation increasingly attractive

The use of dollar’s reserve currency status by the US to wage an economic war via sanctions and its monetary policy decisions which have led to the exportation of inflation to other countries, among other things — have led to increasing calls for de-dollarisation in several countries around the world, most of which aren’t allied with the US.

“By weaponizing dollar dominance and permitting expanding mandates to disorient US monetary policy, the dollar’s fate as the lingua franca of world commerce over the long haul may already be sealed,” said economist Peter C Earle in a piece for American Institute for Economic Research.

The list of countries which have made moves against the dollar include China, Russia and Iran – while the latter two have done this due to sanctions imposed on the US and its allies, China’s moves are more nuanced and are motivated by its desire to dethrone the US as the world’s superpower.

Other countries which have joined the bandwagon recently are India, Saudi Arabia, Brazil and even Malaysia.

India has kicked off its efforts in earnest with its new foreign trade policy that went into effect in April this year. As a result, 18 countries, including the UK, Germany, Singapore and others have agreed to do trade settlements in rupee.

China is in talks with Saudi Arabia to use yuan instead of dollar for its crude oil purchases. Brazil’s president Lula has urged BRICS countries – a group that includes Brazil, Russia, India, China and South Africa – to trade in local currencies and stop using dollars.

“Why can’t an institution like the BRICS bank have a currency to finance trade relations between Brazil and China, between Brazil and all the other BRICS countries?” Lula remarked on Thursday last week during a visit to the Shanghai-based New Development Bank, challenging the dollar’s hegemony and calling its role in the global economy ‘outsized’.

China has already kicked this off, settling its first trade of liquified natural gas (LNG) in yuan with France’ TotalEnergies. Post Russia being shut out from the SWIFT payment system, yuan has replaced dollar as the most traded currency.

It will be a long journey

To be sure, though, talks of de-dollarisation have been going on for decades. The desire for a stable, politically-neutral currency has always been present, but it has never materialized and the dollar has continued to be the reserve currency of the world despite several hiccups during its reign so far.

“So long as the political will to moor US fiscal and monetary policies to those consistent with the constitution of sound money remain an inconversable matter, de-dollarization will proceed. And slower or more quickly, the dollar will lose ground abroad,” Earle added.

It’s completing that journey which could take a long, long time, thanks to the pervasiveness of the dollar in global trade and the network effects associated with it. While 88% of international transactions were dollar-denominated, only 31% were in the euro, and an even less 7% in yuan.

According to an analysis by Deutsche Bank, the dollar is facing a challenge to its status on multiple fronts. This includes the use of local currencies between two countries as a medium of exchange. This has by far the biggest weapon in the arsenal of countries looking to reduce their reliance on the dollar.

Another critical measure of reducing dependence on dollars is private sector flows – the euro is once again the closest competitor to the dollar, accounting for 31% of the total flows at the end of 2022, while the dollar held a share of 47%. However, the dollar's share has fallen by 5 percentage points over the past 20 years.

All said and done, though, the consensus amongst economists is that de-dollarisation will be a long journey, and fraught with uncertainties.

“The USD is likely to remain the dominant reserve currency, probably for decades to come,” said Deutsche Bank analyst Alan Ruskin.

Whether an existing currency dethrones the dollar or a new reserve currency is created – sometimes referred to as Bretton Woods III – the dollar remains the King for the time being. The clock is ticking, though.

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