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Has De-Dollarization Begun?

Overview:
• Since the Bretton Woods system, the U.S. dollar has been a dominant global currency.
• It is widely used in international trade, finance, and as a reserve currency.
Factors Cementing Dollar's Dominance:
1. Bretton Woods Stability (1944):
• 44 countries pledged their currencies to the dollar.
• Stable framework reduced volatility and increased global trade.
• Easy convertibility of the dollar facilitated international transactions.
• The U.S. government agreed to convert the US dollar at the rate of $35 per ounce of
gold.
2. Post-1971 Challenges:
• Nixon suspended dollar convertibility to gold in 1971.
• Various interventions, Plaza Accord of 1985, and technological innovations stabilized
the dollar.
• The U.S. remained the largest economy and a stable source of dollars.
• Military power maintained credibility and trust in the predictive value of the dollar.
• The rapid transformation of international finance due to technological innovations
favored holding and trading US dollars.
3. Current Dollar Dominance:
• IMF (2021) reports over 60% of global foreign reserves in U.S. dollars.
• U.S. dollar used in 90% of all foreign exchange transactions worldwide.
• SWIFT system shows U.S. dollar used in 42-45% of total payments (2022-2023).
• Saudi Arabia agreed in 1974 to price oil in dollars, contributing to the dollar's
dominance in oil trade.
• More than 80% of the oil trade is settled in the U.S. dollar.
Challenges to Dollar Dominance:
1. Asian Monetary Fund Proposal:
• Japan's 1997 proposal revisited by China and Malaysia.
 • Ongoing talks for the revival of the Asian Monetary Fund to reduce dependence on the
U.S. dollar.
2. BRICS Initiatives:
• Brazil, Russia, India, China, and South Africa working on a common currency.
• Potential financial accord by August 2023 to challenge American dominance.
• BRICS countries may emerge as a strong economic bloc.
• Russia and China actively seeking alternatives to the U.S. dollar.
3. String of Deals by China:
• Bilateral currency swap agreements with 41 countries (2009-2020).
• Yuan-dominated trade valued at 7.9 trillion yuan or 1.1 trillion US dollars in 2022.
• Brazil accepting yuan for trade and increasing its yuan-dominated foreign exchange
reserves.
• China challenging the petrodollar regime and conducting yuan-settled energy deals.
4. Petrodollar Threat:
• Saudi Arabia open to trading in currencies other than the dollar in 2023.
• China conducting negotiations with Middle Eastern and North American countries to
trade in local currency.
SWIFT as a Tool and China's Alternative:
• SWIFT used by the U.S. as a tool to maintain financial dominance.
• China's alternative: Cross-Border Interbank Payment System (CIPS) launched in 2015.
• CIPS reported 2.6 million transactions in 2021, a 58% increase from the previous year.
• However, CIPS lags behind SWIFT in total volume, with only 19 banks signing on to Phase 1.
China's Capacity for Transformation:
1. Obstacles for China:
• Lack of full convertibility of the renminbi.
• Capital controls limit renminbi's role in international transactions.
• China's financial markets, while advanced, lack the depth and liquidity of the U.S.
2. Internationalization Challenges:
• Size and strength of the U.S. economy.
• Depth and liquidity of U.S. financial markets.
• Historical dominance of the U.S. dollar since World War II.