As we head into 2024, the dynamics of geopolitics are at the core of global markets.
So far, America has imposed sanctions against countries to cut them off from the global payment systems and dollars.
Many countries, including Russia, are looking at alternatives to the dollar.
For a very long time, the US dollar has dominated international markets. It still does so, although, during the past 20 years, the US economy has produced a decreasing percentage of the world’s production.
Central banks are no longer keeping as much of the US dollar in reserves as they formerly did, even though the currency is still far more prevalent in international commerce, international debt, and non-bank borrowing than it is in the US share of trade, bond issuance, and international borrowing and lending.
Dollar demand waning?
The latest International Monetary Fund’s (IMF) data shows a decline in the dollar’s share in global central banks’ foreign currency reserves.
The data shows the dollar’s share is down to the lowest in the September quarter since the final three months of last year.
The extensive use of dollars in international commerce, particularly for commodities and energy, has helped the greenback over the years.
The dollar’s dominance among trade partners has allowed the US to sustain budget deficits and control funding costs by directing cash into US government bonds.
Additionally, it helps US businesses since firms often find it less expensive to borrow money due to the extensive usage of dollars in international commerce, particularly for commodities and energy.
The dollar has been the preferred reserve currency for most of the world’s central banks.
However, the dollar has progressively lost dominance since 2000, when its share was above 70%.
The US currency’s share is down to 59.2% in the September quarter, marking the lowest since it fell below 60% last year.
The euro’s share in the reserves fell slightly while the Japanese yen rose. The shares of the Chinese yuan, the British pound, the Australian and Canadian dollars, and the Swiss franc were changed only slightly.
A group of “other currencies.” including the rupee, rose in the previous quarter.
What does it mean to global trade and currencies?
This reflects the global mood towards the dollar and the US.
Most countries are slowly but surely moving away from dollar-denominated trade.
Instead, they seek to settle trade in their own currencies. India, for example, has set up a rupee-trade mechanism for trade settlements.
China has also pushed for trade settlements in the yuan. These alternative trade settlement mechanisms are slowly gaining traction.
But the dollar’s share is still over 50%.
Still, the shift away is clear and noticeable.
Dollar lacks competition
Despite a two-decade drop in its proportion of global foreign currency reserves, the US dollar is still utilised more than all other currencies combined.
A new IMF working paper shows that the diminished significance of the US dollar has not been balanced by rises in the proportions of the other traditional reserve currencies – the euro, yen, and pound.
Furthermore, even while the proportion of reserves kept in the renminbi has increased somewhat, this only makes up 25% of the recent move away from dollars, partially attributable to China’s highly tight capital account.
An update to the data in the IMF’s working paper reveals that about one-third of the world’s renminbi reserves were held by one nation, Russia.
However, three-quarters of the shift away from dollars is accounted for by the currencies of smaller economies that haven’t typically played a significant role in reserve portfolios, such as the South Korean won, the Swedish krona, and the Australian and Canadian dollars.
The cost of employing credit derivatives to guarantee against default is a measure of economic risk premium, and a regression study of global reserve currency shares indicates that a greater premium deters a currency’s position in global reserves.
Holders prefer the currencies of nations with reputable governments, stable economies, and strong financial systems.
So, it will take a long time for other currencies to be able to overshadow the greenback.
