The Fallacy of De-dollarization: A Misguided Narrative for the Uninformed
MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.
Recently, there has been increased interest in the dedollarization thesis, which proposes that nations will stop utilizing the US dollar as their main reserve currency. But this idea is fundamentally wrong, and only the gullible should entertain it. In actuality, rather than as a result of American pressure, nations voluntarily use the US dollar for commerce with other countries. Additionally, dollar-denominated assets represent the biggest markets for safe investments, and the dollar continues to be the most widely used currency for transacting business.
Bilateral Trade Agreements: Quick Fixes, Not Long-Term Solutions
Partner countries` bilateral trade agreements are not attempts to avoid the dollar. Instead, they act as short-term ad hoc trading facilities for certain circumstances when money is tight and other, more affordable methods can be used to assist trade.
The Logical Fallacy of BRICS Exclusivity
The emergence of the BRICS nations (Brazil, Russia, India, China, and South Africa) and their rising efforts to conduct commerce completely outside of the US currency are frequently cited as arguments in favor of dedollarization. This argument is absurd for a number of reasons. First, for years to come, these nations will still owe US dollars at various points throughout their supply chains. None of these nations can afford to stop developing at this moment, and refraining from using US currency for an extended period will impede development.
BRICS Countries` Demographic Challenges
The BRICS nations, with the exception of India, face stark demographic realities that make growth more challenging. For instance, the increasingly aging populations in both China and Russia are placing strain on their economies and posing difficulties for growth. Elderly populations consume far less than younger ones, and countries with them must therefore export what they produce but cannot consume.
The Benefits of the US Dollar That Are Inherent
There is no historical accident or use of force that led to the US dollar`s supremacy in international trade. Rather, countries use it because it is widely accepted, relatively stable, and precludes the necessity for additional transaction costs. This is analogous to using cash to purchase an item versus using a gift card issued by a retailer. With cash, aka dollars, goods can be purchased in any country accepting them. With a gift card, aka a bi-lateral currency agreement, this can only be done with one other country.
Size and Depth of the Dollar-Denominated Asset Market
| Currency | % of allocated FX reserves | Date |
|---|---|---|
| US Dollar | 59.5% | 2021-Q3 |
| Euro | 20.5% | 2021-Q3 |
| Japanese Yen | 5.9% | 2021-Q3 |
| UK Pound Sterling | 4.7% | 2021-Q3 |
| Chinese Renminbi | 2.4% | 2021-Q3 |
| Canadian Dollar | 2.0% | 2021-Q3 |
| Australian Dollar | 1.7% | 2021-Q3 |
| Swiss Franc | 0.2% | 2021-Q3 |
| Other currencies | 3.0% | 2021-Q3 |
The US dollar-denominated asset market is substantial and diverse, making it a desirable place to make investments. The largest markets for safe investments are represented by assets denominated in dollars, which makes it simpler for nations to keep and trade these assets, ensures liquidity, and lowers transaction costs.
Alternative Currencies: Far from Displacing the Dollar as the Global Reserve Currency
The emergence of alternative currencies like the Chinese yuan or gold is cited by proponents of dedollarization as evidence of the dollar`s declining dominance. These substitutes, though, are wholly inadequate for modern world trade. Less than 2% of global trade is settled in Chinese Yuan, largely due to the country`s closed capital account. No currency can serve adequately as a global reserve without an open capital account, and every time China has endeavored to relax capital controls, capital has fled in droves. The yuan, therefore, is only valuable insofar as it can be traded back to China for Chinese goods.
The Euro cannot serve as a global reserve currency because few trust the issuer after it confiscated Cypriot depositors` funds to pay for a bailout of the Cyprus banks. Moreover, the EU is structurally too weak to legitimately issue the global reserve, because the disparate political interests and monetary policies in the EU only pretend to be aligned through a single currency. In fact, these differences weaken the euro significantly, as those differences are very real; a southern European and a northern European have very different core interests, and thus different policy needs. A common currency issued between them belies this reality.
Baskets Of Weak Currencies Are Not Suddenly Strong
The Japanese yen, the British pound sterling, and the Australian dollar round out the top 5 global currencies, and already represent a sizable share of reserve portfolios. Gold is much too small an asset class to support global trade at modern scale. Silver has productive value beyond its currency value. Cryptocurrencies are viewed as money laundering facilities by most governments. The bottom line: The market has spoken. Countries prefer to use the dollar when they can. When it is less-available, such as in a fast-rising rate environment, they may transact bilaterally to overcome short-term dollar illiquidity.
Conclusion: Dedollarization is a misreading of a short-term reaction to acute pain brought on by an increasing lack of dollars as rates have risen so quickly.
The myth of dedollarization is a simplistic and misinformed idea that ignores the US dollar`s inherent benefits in international trade. Dedollarization is an improbable prospect in the near term, as evidenced by the stability of the dollar, the breadth and depth of dollar-denominated asset markets, and the continued reliance of nations like the BRICS on the US dollar inside their supply chains and asset bases. It is critical for observers to understand the nuances of international trade and the key role the US dollar continues to play in promoting global economic growth rather than accept this oversimplified narrative.
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