Over the last six months, the US dollar has depreciated against most currencies globally. This weakness comes after a continuous period of appreciation observed between June 2021 and October 2022.
According to data from the Nominal Broad US Dollar Index published by the St. Louis Fed and which measures the performance of the dollar against a basket of international currencies, the dollar has depreciated approximately 7% between October and the end of last week .
Despite this, the dollar is still slightly above its pre-pandemic level and considerably above its 10-year average according to the same index.
However, this recent weakness, coupled with some events that have attracted the attention of the financial media, have reactivated the debate on the challenge of other currencies to the historical dominance of the dollar as the global reserve and commercial exchange currency.
Among these events, the following stand out: 1) The first natural gas purchase contract between France and China denominated in yuan instead of euros or dollars; 2) The announcement of Russia considering the incorporation of the yuan as a currency to its international reserves; 3) An agreement between China and Brazil to use the yuan as the currency of exchange for commercial transactions instead of the dollar; 4) The announcement that Saudi Arabia could accept yuan instead of dollars in oil sales; 5) The news that the BRICS (Brazil, Russia, India, China and South Africa) are considering developing a new currency; 6) India’s decision seeking settlement of international trade operations with some trading partners in Rupees instead of dollars; 7) The announcement that the yuan has surpassed the euro as the most important currency in Brazil’s international reserves; 8) The publication of IMF data revealing that a third of Russia’s international reserves are in yuan; 9) The agreement between Russia and China to avoid the dollar and use the yuan as a currency for international trade operations; and 10) the rise in the price of gold and cryptocurrencies after the crisis in some regional banks in the United States.
For some observers, these events herald the beginning of the end of the dollar’s global dominance as a currency in international trade and as a reserve currency; and the rise of other currencies for these purposes, such as the yuan.
However, this story is not new. The dollar has been losing ground as a reserve currency against other currencies for some time. So far this century, the dollar’s share in the official international reserves of all central banks globally has dropped from 71 to 59 percent.
Meanwhile, in the same period, the share of the dollar as a currency for international trade transactions has remained relatively stable at a level close to 60 percent.
The second most important currency for international trade is the euro with a share of approximately 25%, the next currency is the yen with a share close to 10%, then the pound sterling and finally the yuan with a minuscule market share.
In the opinion of this columnist, the decline of the dollar as a currency of exchange and reserve is being exaggerated and taken out of context.
Although the dollar will continue to lose market share as a reserve currency and currency for international trade, this could take decades and will be a natural consequence, as it is now, of the growth in importance of other economies globally.
The currency that some media have positioned as the main threat to the dollar is the yuan. However, as long as this is a currency subject to capital controls, it will not be easy for it to dispute its dominance with the dollar.
For China, capital controls and intervention in the price of its currency are due to a matter of political control, but also for economic reasons, so it seems difficult for the Xi Jinping regime to eliminate these practices.
In conclusion, the de-dollarization of the global economy is a phenomenon that could take decades despite what some headlines propose.
