The Chinese regime’s yuan push for de-dollarization, efforts by the BRICS bloc to create a new reserve currency, and the euro’s growing influence aren’t enough to unseat the U.S. dollar as the world’s dominant reserve currency, a new study released on June 25 revealed.
BRICS is an intergovernmental organization comprising Brazil, Russia, India, China, South Africa, and recently added members Egypt, Ethiopia, Iran, and the United Arab Emirates (and invitee Saudi Arabia).
According to the Atlantic Council’s latest “Dollar Dominance Monitor,” the dollar continues to dominate global foreign reserve holdings, trade invoicing, and currency transactions, while its role as the primary global reserve currency remains entrenched in the near and medium term.
The report added that the robust U.S. economy, tighter monetary policy, and increased geopolitical risks have recently reinforced the pivotal role of the U.S. dollar in the global economy.
Despite economic fragmentation and efforts by the BRICS countries to diversify into other international and reserve currencies, the dollar’s influence remains strong.
It’s also despite that recent data from the International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves indicate a gradual decline in the dollar’s share of central bank and government-allocated foreign reserves.
A reserve currency is one that central banks hold in substantial amounts for international trade and financial transactions, helping to minimize transaction costs associated with foreign currencies.
Since World War II, the U.S. dollar has been the world’s primary reserve currency.
According to Atlantic Council estimates, globally, the dollar accounts for 58 percent of the value of foreign reserve deposits. The euro, the second-most-used currency, accounts for barely 21 percent of foreign reserve assets.
Nearly half of all international loans, global debt securities, and international trade invoices use the dollar. In addition, in international exchange markets where currencies are traded, the dollar accounts for about 90 percent of all transactions, according to the Congressional Research Service (CRS).
During major economic crises, investors turn to the dollar as a “safe haven” currency. For instance, during the global financial crisis of 2008–09 and the economic instability caused by the COVID-19 pandemic in 2020, investors flocked to the U.S. dollar, expecting its value to remain stable.
In both crises, the U.S. Federal Reserve employed extraordinary monetary measures and established currency exchange lines with foreign central banks to ensure liquidity and the availability of dollars.
The CRS adds that the demand for U.S. dollars remains high because many international financial institutions and central banks have an appetite for holding dollars and dollar-backed assets, such as U.S. Treasury bonds. That demand allows the United States to borrow at more favorable interest rates than what it would have otherwise.
Dollar Unchallenged
Typically, shifts from one major international currency to another take several years, often decades.Still, in recent years, particularly following Russia’s invasion of Ukraine and the subsequent escalation of financial sanctions by the Group of Seven (G7), some countries have indicated their intent to diversify away from the dollar, the Atlantic Council says.
“Over the past 24 months, the members of BRICS ... have been actively promoting the use of national currencies in trade and transactions,” the report said.
BRICS members, for instance, have shifted their focus from establishing a shared currency to developing new cross-border payment systems, aiming to create a more multipolar financial system.
Though BRICS countries have only just begun to negotiate an intra-BRICS payment system, they have already secured bilateral and plurilateral agreements on topics such as currency swaps and cross-border wholesale central bank digital currency.
The Atlantic Council added that it may be difficult to scale a currency-exchange platform on top of these agreements because of liquidity and regulatory concerns.
Leading the initiative of an alternative global reserve currency, according to the council, China has accelerated the development of its Cross-Border Interbank Payment System (CIPS), a renminbi-settlement mechanism.
Between June 2023 and May 2024, the CIPS expanded by adding 62 direct participants, bringing the total to 142 direct and 1,394 indirect participants, the report noted.
While the Society for Worldwide Interbank Financial Telecommunication (SWIFT) remains the dominant player with more than 11,000 connected banks, direct participants in CIPS can clear transactions independently of SWIFT or the dollar.
“During this same time, China has [also] been expanding its alternative payment system to its trading partners and seeking to increase international usage of the renminbi,” the report said.
Yet, while Beijing actively supported renminbi liquidity through swap lines, its proportion in global foreign currency reserves fell to 2.3 percent in the final quarter of 2023 from 2.8 percent in 2022, the report estimated.
“Reserve managers might be perceiving the renminbi as a geopolitically risky currency because of concerns about China’s economy, Beijing’s position on the Russia–Ukraine war, and increased tensions with the U.S. and G7,” the report said.
Similarly, the euro, once seen as a potential rival to the dollar’s international dominance, is now significantly behind and losing its appeal as a reserve currency.
The sanctions leveled at Russia in 2022 demonstrated to reserve managers that the euro carries similar geopolitical risks as the dollar. Consequently, those seeking to mitigate risks away from the dollar have turned to gold, the council noted. Nearly a third of all central banks intend to boost their gold reserves in 2024.
Although other currencies have gradually gained traction in global reserves over recent years, the dollar’s dominance endures. The absence of practical alternatives continues to reinforce its global supremacy, Federal Reserve Governor Christopher Waller outlined earlier this year.
