De-dollarization could reduce institutional, investor and corporate demand for the dollar over time, and in size could cause its value to fall. If there is a specific catalyst for the move, de-dollarization could also result in heightened exchange rate volatility, especially as over 60 currencies are pegged to the greenback.
However, while some signs of de-dollarization are emerging in currency markets, the dollar is thus far still maintaining its dominance. “Overall dollar usage has declined, but it remains within long-run ranges and its share remains elevated compared to other currencies,” said Meera Chandan, Co-Head of the Global FX Strategy research team at J.P. Morgan.
Looking at FX volumes, the dollar’s share stands at 88%, near record highs, while its share of trade invoicing, cross-border liabilities and foreign currency debt issuance has held steady over the last two decades. “The dollar’s transactional dominance remains top-of-class despite secular declines in U.S. trade shares. On the other hand, de-dollarization is evident in FX reserves, where the dollar’s share has declined to a record low of 58%,” Chandan noted.
Which currencies could dethrone the greenback? “In terms of competitors, China has been attempting to internationalize the renminbi. However, the renminbi’s global footprint is still small despite growing every year, and this will be a long process requiring reform,” Chandan said. For instance, the renminbi makes up just 2.3% of SWIFT payments, versus the dollar’s share of 43% and the euro’s share of 32%.
“With China’s growing centrality in global commerce, one might naturally expect the renminbi to assume a greater role in the global economy over time, but this transition would likely occur over the course of decades,” Wise added. “Relaxing capital controls, opening markets, implementing measures to promote market liquidity, bolstering the rule of law, reducing appropriation and regulatory risk, and promoting Chinese government bonds as an alternative safe asset — these could all cement China and the renminbi as a credible alternative to the U.S. and the dollar.”