The FDI angle:

• The Brics expansion could help accelerate the de-dollarisation of the global economy, argues ING. 
• The US dollar's share of global forex reserves stands at an all-time low, but no clear alternative has emerged yet. 
• “De-dollarisation is happening, but very, very gradually,” says UC Berkeley's prof. Barry Eichengreen
• Why does it matter? Dollarisation of the global economy in the wake of World War II sealed the US role as the driving force of global trade and investment. This role is now under threat as new economic blocs launch alternative platforms for trade and investment. 

In August 2023, fresh impetus was given to decades of efforts to reduce the US dollar’s dominance in global trade, finance and investment. Leaders of the Brics countries — Brazil, Russia, India, China and South Africa — invited six more countries to join their emerging market club during a summit held in Johannesburg.

Some, like Dutch bank ING, argue that the addition of major oil exporters like Saudi Arabia, Iran and the UAE could help accelerate de-dollarisation and the progression to a multi-polar world. Indeed, Saudi Arabia has already threatened to begin pricing its oil and gas in non-dollar currencies and China said it will push to buy fossil fuel from the Gulf in Chinese yuan.

The Brics expansion, at the very least, is a culmination of long-running demands by developing countries to boost the use of non-dollar currencies in global commerce. Brazil’s president Luiz Inácio Lula da Silva has even called for the bloc to create its own currency for trade and investment between its members.

Yet after almost six decades of gripes about the greenback’s supremacy, data suggests the status quo will remain for many more years to come. While the dollar’s share of global foreign exchange reserves has slipped to an all-time low of 58%, according to the IMF, the share of its closest rival, the euro, is still just 20.5%.

“De-dollarisation is happening, but very, very gradually,” says Barry Eichengreen, professor of economics and political science at University of California, Berkeley. “It’s fair to say that the rhetoric is way out ahead of the reality.”

The US dollar — freely convertible and backed by credible institutions and geopolitical influence — is unlikely to be dethroned as the world’s dominant reserve currency any time soon. Sufficient dollar reserves remain crucial to trade, finance and investment, and most commodities are priced in US dollars.

However, more efforts are being made to boost non-dollar trade corridors, and fresh questions are being asked by economists about the dollar’s future status. Rating agency Fitch downgraded the US government’s credit rating in August over unsustainable spending habits and a deterioration in standards of governance.

Geopolitical divides

The US dollar’s role has come under renewed scrutiny in the post-pandemic world due in part to sweeping Western sanctions imposed on Russia after its invasion of Ukraine. 

In March 2022, the IMF’s deputy managing director Gita Gopinath told the Financial Times that sanctions threatened to eat away at the US dollar’s dominance. She said it could encourage greater use of other currencies in global trade and a diversification of reserve assets held at central banks.

The war in Ukraine has “accelerated the corridors that were already trying to de-dollarise”, says Abishur Prakash, founder of The Geopolitical Business, an advisory firm. He says the “fear of sanctions” is driving many countries to push towards financial sovereignty outside the US-led international order.

In February, Reuters reported that Indian refiners had been paying for Russian oil via Dubai-based traders in UAE dirhams. During a state visit to Moscow in March, China's president Xi Jinping met with Vladimir Putin where both leaders reaffirmed their commitment to increase the use of their local currencies in bilateral trade. One month later, the Chinese yuan overtook the US dollar for the first time as the most traded currency by volume on the Moscow Exchange.

In early September, Indonesia set up a national 'de-dollarisation' task force aimed at reducing US dollar dominance in south-east Asia. A month earlier, finance ministers and central bank governors from the Association of Southeast Asian Nations agreed to enhance the use of local currency transactions in the region. More than 80% of exports in Asia are still invoiced in dollars, according to the Asian Development Bank.

“De-dollarisation may not be taking off the way many intended or predicted. The bigger transformation is that countries are challenging the US-led world order like never before,” says Mr Prakash. 

China’s governance concerns

China has been attempting to internationalise the renminbi for many years, but its role remains insignificant at just 2.3% of global payments undertaken on the Swift banking network. Compare this with 43% for the US dollar and the euro’s share of 32%.

Analysts and economists stress that for China’s renminbi to rival the US dollar as a reserve currency it would need to move to full convertibility. But this risks capital flight and could lead to the Chinese authorities losing their ability to manage its exchange rate, according to Hasnain Malik, Dubai-based managing director for emerging and frontier market equity strategy at analyst Tellimer.

“Furthermore, global confidence in the rule of law and independence of Chinese institutions would have to be as high as it is in alternatives like the US or Europe,” he says.

Eamon Aghdasi, a sovereign analyst in emerging country debt at Boston-based fund manager GMO, says that there are “serious question marks” over China’s capital controls and ambiguity with regard to property rights and the legal framework.

“It’s going to be very difficult to put the renminbi on the same level as the US dollar unless one or both of those things are resolved,” he says. 

Alternative reserves

Trade between developing countries often involves transferring local currencies into major currencies like US dollars to settle transactions, and then back again into local currencies. 

“There has to be a more efficient means of exchange,” says Samaila Zubairu, CEO of Africa Finance Corporation. “We will always be on the losing end. There has to be a conversation around how we can use a lot more of the resources we have to back our currencies [to] have better terms of trade.”

A number of African countries have been stocking up on gold produced locally as a way of boosting their foreign reserves, including Tanzania and Ghana. Gold held by central banks in developing countries has grown by 52% over the past decade to reach 338 million tonnes last year, according to IMF figures.

Despite all these efforts, the dollar remains dominant in foreign exchange volumes, accounting for 88% of the global total in 2022, a share that has been unchanged since 2016, according to JPMorgan. This is despite a decline in the US dollar’s share of global exports, which stood at just 9% in 2022. Meera Chandan, co-head of JPMorgan’s global foreign exchange strategy research team, says that even if overall dollar usage has declined, its “transactional dominance remains top-of-class”. 

While the Brics enlargement and non-dollar trade routes have shown the political will for de-dollarisation, Mr Eichengreen says there has been “no movement laying the groundwork for an actual Brics currency”. 

The hope of many countries for an alternative to the US dollar remains a pipedream. “Until there is an alternative with the same credibility of institutions, economic and trade heft, free-convertibility and geopolitical influence sitting behind that alternative then that wish is likely to be unmet,” says Mr Malik.

This article first appeared in the October/November 2023 print edition of fDi Intelligence