As challenges to the supremacy of the US dollar surface, analysis suggests that the world’s preferred currency still has its throne well-secured.
Despite attempts from emerging economies and alternative currencies like the Chinese yuan, the dollar’s dominance continues to command the global financial landscape.
Strategists Meera Chandan and Octavia Popescu from JP Morgan shed light on the reasons why the USD’s reign remains unthreatened for now.
The Unyielding Dollar Dominance
Astonishingly, the dollar accounts for a whopping 88% of foreign exchange trading volumes, nearly reaching an all-time high. Conversely, the Chinese yuan’s presence in the same arena barely scratches the surface, accounting for a mere 7%.
The figures paint a picture of the dollar’s pervasiveness in world trade, underscoring the unparalleled clout it carries in the global market.
The USD’s steadfast position may seem paradoxical in light of the increasing pressures, including steep US interest rate hikes and sanctions that froze Russia out of the global banking system.
This harsh economic climate instigated a unified effort by the BRICS nations – Brazil, Russia, India, China, and South Africa – to challenge the dollar’s dominance. Yet, even in the face of these challenges, the currency remains the currency of choice for the world’s financial transactions.
An Erosion That Doesn’t Undermine
Chandan and Popescu highlight a more nuanced picture amidst the dollar’s overbearing dominance.
While the dollar’s share in foreign exchange trading volumes is colossal and hasn’t fluctuated much in the context of trade invoicing over the last few decades, there are domains where the currency has seen a subtle decline.
Notably, its share of foreign exchange reserves held by central banks worldwide has slipped to a record low of 58%.
However, when accounting for gold reserves, which have increased to 15% compared to 11% five years ago, the USD’s share falls even further. Nonetheless, it continues to have the largest share compared to any other global currency.
These indications of “de-dollarization” are emerging, but the USD continues to leave a large footprint on the global financial landscape.
Mounting efforts from the BRICS countries and other major commodity exporters to decouple the dollar’s grip on global commerce have intensified. Saudi Arabia and China, for instance, are negotiating to settle Chinese oil sales with the yuan.
Brazil and China are introducing a yuan clearing arrangement for their trade, and China and Russia have begun to conduct significant parts of their trade in yuan.
Despite these efforts, progress in internationalizing the yuan is somewhat limited, with the currency accounting for a paltry 2.3% of SWIFT payments compared to the dollar’s robust 43%.
This can be attributed to China’s stringent capital controls, which are likely to stymie any significant leaps in the yuan’s international reach.
So, while the Chinese yuan and other currencies may be gearing up for a fight, the US dollar stands firm. It continues to command the lion’s share of foreign exchange volumes and plays a pivotal role in global trade and finance.
Until significant shifts in global economic power structures occur, the dollar’s dominance seems destined to endure.