{"id":19350,"date":"2023-10-03T20:00:00","date_gmt":"2023-10-04T00:00:00","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/insights\/de-dollarization-the-dollar-in-doubt"},"modified":"2025-05-23T12:15:23","modified_gmt":"2025-05-23T16:15:23","slug":"de-dollarization-the-dollar-in-doubt","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/insights\/de-dollarization-the-dollar-in-doubt","title":{"rendered":"De-dollarization: The dollar in doubt?"},"content":{"rendered":"\n<p><em>RBC Wealth Management\u2019s \u201cWorlds apart: Risks and opportunities as deglobalization looms\u201d series explores the trend away from globalization and its ramifications for investors, economies, and financial markets.<\/em> <em>This article in the series focuses on the impacts of de-dollarization<\/em>.<\/p>\n\n\n\n<div class=\"wp-block-rbcwm-well well is-style-is-style-b-blue-tint-4 b-blue-tint-4 mb-3 migrated\">\n<h2 class=\"wp-block-heading has-text-align-left\" id=\"h-key-points\">Key points<\/h2>\n\n\n\n<ul class=\"list-spaced wp-block-list\">\n<li> The U.S. dollar is the world\u2019s reserve currency and the backbone of the global payments infrastructure. <\/li>\n\n\n\n<li> Countries that face restrictions over the use of this system due to sanctions would like to see an alternative. <\/li>\n\n\n\n<li> If the dollar were to be supplanted, the U.S. would lose many benefits that accrue to the dollar\u2019s reserve currency status. <\/li>\n\n\n\n<li> The entrenched nature of the dollar in global finance, together with conflicting political goals amongst its detractors, suggests a practical replacement is unlikely. <\/li>\n<\/ul>\n<\/div>\n\n\n\n<p>       The mighty greenback has reigned supreme as the world\u2019s reserve currency       since at least the abandonment of the gold standard in the 1970s, and       likely since the end of World War II. It is also the world\u2019s predominant       currency for the transaction of goods and services between nations and       trading blocs. The currency has cemented its status with the development       of a global payments infrastructure during this time\u2014simply put, it\u2019s hard       for countries and multinational companies to wean themselves off the U.S.       dollar system.     <\/p>\n\n\n\n<p>       But the rapid pivot away from liberalized trade agreements toward a       multipolar protectionist world brings the dollar\u2019s status back into focus.       Sanctions imposed on Russia subsequent to its 2022 invasion of Ukraine       raised the hackles of authoritarian regimes across the world as they       realized there were few alternatives to the dollar world.     <\/p>\n\n\n\n<p>       This has led to the idea of de-dollarization\u2014or the goal of creating a       competitor to the dollar\u2019s role as both a reserve currency and as a       highway system for global transactions.     <\/p>\n\n\n\n<p>       We look at the challenges of de-emphasizing the dollar and its related       global infrastructure and argue that the dollar\u2019s \u201cexorbitant privilege\u201d       as a reserve currency and payment system has few realistic challengers.     <\/p>\n\n\n\n<h2 class=\"wp-block-heading\">The more things change, the more they stay the same<\/h2>\n\n\n\n<p>       The recent drumbeat of angst over the dollar\u2019s status is nothing new.       Historically, calls for the dollar to be supplanted as a reserve currency       grow louder when one or more of several developments occur. A change in       the long-term trend of the dollar\u2019s valuation against other currencies,       specifically when a strengthening trend pivots to a weakening trend, often       triggers this debate. And U.S. partisan politics can play a       part too, particularly if political dysfunction and fiscal woes prompt a       downgrade of the country\u2019s credit rating. Increasing geopolitical tensions       and generational changes in the global order tend to sharpen the debate,       and lastly, rapid technological change can open the door to rivals to the       dollar\u2019s status. In our view, all four factors are at play at this time.     <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">The start of a new dollar bear market? Too early to say<\/h3>\n\n\n\n<h4 class=\"wp-block-heading\">Trade-weighted U.S. Dollar Index (DXY)<\/h4>\n\n\n\n<div class=\"row mb-4 migrated\">       <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">         <img decoding=\"async\" src=\"https:\/\/www.rbcwealthmanagement.com\/en-ca\/wp-content\/uploads\/sites\/5\/2023\/10\/dollar-in-doubt-en-chart-1.png\" alt=\"Trade-weighted U.S. Dollar Index (DXY)\" class=\"img-fluid mb-1-half\" \/>         <p           class=\"sr-only\"           id=\"chart1desc\"         >         Line chart showing the value of the trade weighted dollar index, with four distinct cycles averaging 9 years in length with moves of the order of 40% to 60%. The latest bull cycle may have ended in 2022 after an 11-year run.       <\/p>         <p class=\"disclaimer\">           Source &#8211; RBC Wealth Management, FactSet; monthly data from January           1985 through September 2023         <\/p>       <\/div>     <\/div>\n\n\n\n<h2 class=\"wp-block-heading\">What is de-dollarization anyway?<\/h2>\n\n\n\n<p>       De-dollarization is the process of reducing the world\u2019s reliance on the       dollar as the world\u2019s primary reserve currency and transaction currency       for international business. This may occur naturally as technology and       global growth provide more alternatives to the dollar, but some countries       might want to nudge the process along for their geopolitical advantage.     <\/p>\n\n\n\n<p>       According to the International Monetary Fund (IMF), the dollar accounted       for 59 percent of global currency reserves at the end of Q1 2023, down       from more than 70 percent in 2001, but still well ahead of the euro at       around 20 percent and the Japanese yen at around five percent. And the       share of reserves really hasn\u2019t changed much since the start of the war in       Ukraine and the U.S. Treasury Department\u2019s associated financial sanctions       on Russia.     <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">       Contenders vs. pretenders: No big changes in global reserve currencies     <\/h3>\n\n\n\n<h4 class=\"wp-block-heading\">Shares of global reserves held in major currencies<\/h4>\n\n\n\n<div class=\"row mb-4 migrated\">       <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">         <img decoding=\"async\" src=\"https:\/\/www.rbcwealthmanagement.com\/en-ca\/wp-content\/uploads\/sites\/5\/2023\/10\/dollar-in-doubt-en-chart-2.png\" alt=\"Shares of global reserves held in major currencies\" class=\"img-fluid mb-1-half\" \/>         <p           class=\"sr-only\"           id=\"chart2desc\"         >         Line chart showing the percentage of global currency reserves held in major currencies quarterly from Q1 2022 through Q2 2023. There has been little change from quarter to quarter over this period. The most visible change is a decrease in the U.S. dollar share from Q3 2022 to Q4 2022 (to roughly 58.6% from 60.1%), with a corresponding increase in the Euro (to 20.4% from 19.5%) and to a lesser extend the British pound. The most recent percentages are: U.S. dollar, 58.9%; euro, 20.0%; Japanese yen, 5.4%; British pound sterling, 4.9%; Chinese yuan, 2.5%; Australian dollar, 2.0%; Canadian dollar, 2.5%; other currencies, 4.0%.        <\/p>       <div class=\"row mb-1-half\">         <div class=\"col-md-6\">           <ul class=\"rbc-legend\">             <li class=\"rbc-legend-item\">               <div class=\"rbc-legend-line c-dark-blue-tint-1\"><\/div>               U.S. dollar (USD)             <\/li>             <li class=\"rbc-legend-item\">               <div class=\"rbc-legend-line c-warm-yellow\"><\/div>               Euro (EUR)             <\/li>             <li class=\"rbc-legend-item\">               <div class=\"rbc-legend-line c-apple\"><\/div>               Japanese yen (JPY)             <\/li>             <li class=\"rbc-legend-item\">               <div class=\"rbc-legend-line c-seaweed\"><\/div>               UK pound sterling (GBP)             <\/li>           <\/ul>         <\/div>         <div class=\"col-md-6\">           <ul class=\"rbc-legend\">             <li class=\"rbc-legend-item\">               <div class=\"rbc-legend-line c-warm-red\"><\/div>               Chinese yuan (CNY)             <\/li>             <li class=\"rbc-legend-item\">               <div class=\"rbc-legend-line c-sky\"><\/div>               Canadian dollar (CAD)             <\/li>             <li class=\"rbc-legend-item\">               <div class=\"rbc-legend-line c-beige\"><\/div>               Australian dollar (AUD)             <\/li>             <li class=\"rbc-legend-item\">               <div class=\"rbc-legend-line c-grey-tint-1 rbc-legend-dashed\"><\/div>               Other             <\/li>           <\/ul>         <\/div>       <\/div>         <p class=\"disclaimer\">           Source &#8211; RBC Wealth Management, World Bank; data as of 9\/29\/23         <\/p>       <\/div>     <\/div>\n\n\n\n<p>       What could replace the dollar as a reserve currency? The two closest       challengers, the euro and the yen, have grown their share of reserve       holdings, but not to the extent of the dollar\u2019s losses. And while China       would like its renminbi to topple the dollar, that currency\u2019s share of       global reserves remains a paltry 2.5 percent, although certain       authoritarian regimes seem increasingly attracted to the currency. For       example, Russia currently holds about a third of all reserves in the       Chinese currency.     <\/p>\n\n\n\n<p>       We don\u2019t think any single currency is positioned to replace the dollar in       the global reserve system. Instead, we expect a gradual diversification       into the many developed nation currencies of Asia and the rest of the       world. Emerging market (EM) currencies will probably need to wait until       the financial community develops enough trust in the soundness of EM       economies.     <\/p>\n\n\n\n<p>       Of course, official reserve accounting may hide the true picture of what\u2019s       going on behind the scenes. The U.S. and Chinese bond markets diverged       after Q1 2023, with U.S. Treasury yields moving higher as investors sold       these bonds and Chinese government bond yields heading in the opposite       direction as buyers increased their purchases.     <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Are diverging yields a sign of de-dollarization? Not so fast<\/h3>\n\n\n\n<h4 class=\"wp-block-heading\">Yields on benchmark 10-year government bonds in the U.S. and China<\/h4>\n\n\n\n<div class=\"row mb-4 migrated\">       <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">         <img decoding=\"async\" src=\"https:\/\/www.rbcwealthmanagement.com\/en-ca\/wp-content\/uploads\/sites\/5\/2023\/10\/dollar-in-doubt-en-chart-3.png\" alt=\"Yields on benchmark 10-year government bonds in the U.S. and China\" class=\"img-fluid mb-1-half\" \/>         <p           class=\"sr-only\"           id=\"chart3desc\"         >         Line chart showing the daily yields of 10-year government bonds in the US and China, with an added bar chart denoting the difference in yields. While U.S. yields moved higher after Q1 2023, Chinese yields moved lower, with the spread between them growing from 41 basis points near the start of April to 189 basis points near the end of September.\t       <\/p>     <ul class=\"rbc-legend rbc-legend-inline\">     <li class=\"rbc-legend-item\">     <div class=\"rbc-legend-line c-dark-blue-tint-1\"><\/div>     U.S. (left axis)     <\/li>     <li class=\"rbc-legend-item\">     <div class=\"rbc-legend-line c-warm-red\"><\/div>     China (left axis)     <\/li>     <li class=\"rbc-legend-item\">     <div class=\"rbc-legend-bar c-beige-tint-1\"><\/div>     Spread (basis points, right axis)     <\/li>     <\/ul>              <p class=\"disclaimer\">           Source &#8211; RBC Wealth Management, FactSet; daily closing yields,           12\/31\/22\u20139\/28\/23         <\/p>       <\/div>     <\/div>\n\n\n\n<p>       This coincided with increasing concerns in the financial media, including       Bloomberg, that some sovereign funds were exchanging their dollar reserves       for the Chinese currency. We think there\u2019s an easier explanation. This       divergence was a result of significant differences between the two       economies. A solid labour market and resilient consumer in the U.S. have       kept inflation higher than is comfortable for bondholders. Whereas real       estate woes and tepid economic growth in China have prompted that       country\u2019s authorities to keep interest rates low.     <\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Excuse me, your \u201cexorbitant privilege\u201d is showing<\/h2>\n\n\n\n<p>       We don\u2019t believe the dollar is at risk of losing its reserve currency       status in the foreseeable future. And that\u2019s a view that will be applauded       by U.S. policymakers, as this status comes with a lot of benefits. This       package of benefits is widely known as \u201cThe Exorbitant Privilege,\u201d a term       coined by French Finance Minister Val\u00e9ry Giscard d\u2019Estaing in the 1960s.     <\/p>\n\n\n\n<p>       One of the benefits is robust international demand for U.S. Treasury       bonds. This demand allows the U.S. government to issue more debt, and at       lower rates, than would be the case if the dollar lost its status. Why is       demand for U.S. bonds so strong? Because foreign nations need a deep,       liquid asset market in which to park their reserves.     <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">The world\u2019s largest savings account?<\/h3>\n\n\n\n<h4 class=\"wp-block-heading\">Share of overseas U.S. Treasury debt holdings by country\/region<\/h4>\n\n\n\n<div class=\"row mb-4 migrated\">       <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">         <img decoding=\"async\" src=\"https:\/\/www.rbcwealthmanagement.com\/en-ca\/wp-content\/uploads\/sites\/5\/2023\/10\/dollar-in-doubt-en-chart-4.png\" alt=\"Share of overseas U.S. Treasury debt holdings by country\/region\" class=\"img-fluid mb-1-half\" \/>         <p           class=\"sr-only\"           id=\"chart4desc\"         >         Bar chart showing the percentage of overseas-held U.S. federal debt by country and region. The largest foreign holder is the European Union with 21.6% of the overseas holdings followed by Japan at 14.5% and China at 13.4%. The rest of the foreign holders are: Other Asian countries, 9%; United Kingdom, 8.7%; All other, 9.5%; Latin America, 5.4%; Switzerland, 3.9%; Cayman Islands, 3.9%; Canada, 3.8%; Middle East, 3.3%, and India at 3.0%.       <\/p>         <p class=\"disclaimer\">           Source &#8211; RBC Wealth Management, U.S. Treasury Department; data as of           August 2023         <\/p>       <\/div>     <\/div>\n\n\n\n<p>       Another benefit is felt via the value of the currency itself. Foreign       demand for the dollar depresses the value of overseas currencies, and       therefore makes imports cheaper in dollar terms for U.S. consumers.       Meanwhile, the foreign exporters get paid for their wares in U.S. dollars       that then get invested in Treasury bonds, and so the cycle continues.     <\/p>\n\n\n\n<p>       So, it would be natural for central bankers in other countries to be       envious of this privilege. But these benefits also come with       responsibilities. The reserve currency status requires a fully convertible       currency and a free-floating exchange rate determined by financial       markets. These requirements are unpalatable to some overseas central       bankers who prefer to keep their own currency under close control\u2014another       reason for the dearth of alternatives to the dollar as a reserve currency.     <\/p>\n\n\n\n<p>       This flexibility of the dollar cements its status as a reserve currency.       It allows it to mop up excesses elsewhere in the world. Currently, there       is a glut of savings outside of the U.S., and very little of those excess       savings are placed in any currency other than the dollar.     <\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Don\u2019t \u201cbuck\u201d the system<\/h2>\n\n\n\n<p>       It&#8217;s not just the dollar\u2019s reserve currency status that proponents of       de-dollarization are eyeing. Some nations are wary of the world\u2019s reliance       on the dollar within the global payments infrastructure. The ease with       which the U.S. and its developed nation partners were able to implement       asset freezes and sanctions on Russia for its invasion of Ukraine caught       the attention of some countries worried they might someday get locked out       of the system.     <\/p>\n\n\n\n<p>       Over the last year, several countries have diversified the payment systems       they use to trade goods, with a view to creating an alternative to the       dollar\u2019s hegemony in global trade.     <\/p>\n\n\n\n<p>       Some of the higher-profile examples include Russia and Iran accepting       Chinese renminbi for their oil sales. India has also stepped up its use of       the Chinese currency, and authorities in Beijing claim that half of their       cross-border payments are now conducted in renminbi. This is a natural       consequence of the Chinese economy moving up the value chain, but it\u2019s       important to note that even with this progress, the renminbi still only       accounts for two percent of global cross-border trade transactions and       four percent of foreign exchange transactions.     <\/p>\n\n\n\n<p>       This is because the dollar payment ecosystem offers advantages built up       over generations that other currencies can\u2019t provide. These include the       ease of raising capital in dollars, and deep derivatives markets that       facilitate hedging for global traders. So while there may be demand for       alternatives to the dollar payment system, the supply of practical       alternatives is likely to remain thin, in our view.     <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">The U.S. dollar dominates the world of foreign exchange<\/h3>\n\n\n\n<h4 class=\"wp-block-heading\">Volume of global foreign exchange transactions by currency<\/h4>\n\n\n\n<div class=\"row mb-4 migrated\">       <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">         <img decoding=\"async\" src=\"https:\/\/www.rbcwealthmanagement.com\/en-ca\/wp-content\/uploads\/sites\/5\/2023\/10\/dollar-in-doubt-en-chart-5.png\" alt=\"Volume of global foreign exchange transactions by currency\" class=\"img-fluid mb-1-half\" \/>         <p           class=\"sr-only\"           id=\"chart5desc\"         >         Bar chart showing the share of foreign exchange volume by transaction currency. The USD is the most traded currency, as it is involved in 44.2% of global transactions. The euro is the next most used with a 15.3% share. Additional currencies shown on the chart are JPY, 8.3%; GBP, 6.4%; CNY, 3.5%; AUD, 3.2%; CAD, 3.1%; CHF, 2.6%, and Other, 13.3%.       <\/p>         <p class=\"disclaimer\">           Source &#8211; RBC Wealth Management, Bank for International Settlements;           data as of 12\/31\/22         <\/p>       <\/div>     <\/div>\n\n\n\n<h2 class=\"wp-block-heading\">All in all, it\u2019s just a few more BRICS in the wall<\/h2>\n\n\n\n<p>       The expansion of the BRICS grouping of developing nations (Brazil, Russia,       India, China, and South Africa) announced during the bloc\u2019s annual summit       in August 2023 caught the attention of the de-dollarization community,       particularly given the tentative discussions toward the creation of a       currency basket or some other alternative to the dollar.     <\/p>\n\n\n\n<p>       However, our view is that the natural geopolitical tensions within the       BRICS+ grouping, together with the reluctance of individual members to       surrender the sovereignty of their own currencies, makes the advent of a       new currency bloc unlikely. We believe the benefits to BRICS+ members       derive from their ability to straddle the fence in terms of international       relationships in the deglobalizing world and expand trade and investment       flows between countries. Any new BRICS financial infrastructure would       likely be limited in scope and more of a bolt-on to the existing global       financial architecture, at least over the foreseeable future.     <\/p>\n\n\n\n<p>       Please see this brief commentary for more of our thoughts on the <a href=\"\/insights\/brics-whats-all-the-fuss-about\" title=\"BRICS: What's all the fuss about?\">         BRICS&nbsp;expansion<\/a>.     <\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Reports of the dollar\u2019s demise are greatly exaggerated<\/h2>\n\n\n\n<p>       We believe the increase in calls for a lessening of the greenback\u2019s status       as a reserve currency and medium of trade is a natural consequence of the       secular trend of deglobalization as weakening demographics and increasing       nationalism create rifts in global geopolitics.     <\/p>\n\n\n\n<p>       However, the dollar\u2019s deeply embedded infrastructure within financial       markets and global trade makes it difficult, in our view, for alternative       currencies to take a significant share of the dollar\u2019s role on the global       stage. We expect the push to de-dollarize to remain in the headlines, but       to not significantly alter the status quo over the next several years.     <\/p>\n","protected":false},"excerpt":{"rendered":"<p>As the world realigns under deglobalization, we examine the challenges to dollar dominance and whether the greenback is facing any true currency rivals.<\/p>\n","protected":false},"author":24,"featured_media":19357,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"rbcwm_post_date":"2023-10-04 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