By Joseph Moss, International Banker
“Every night I ask myself why all countries have to base their trade on the dollar,” Brazilian President Luiz Inácio-Lula da Silva declared in a speech he delivered during his visit to China in April. “Why can’t we do trade based on our own currencies? Who was it that decided that the dollar was the currency after the disappearance of the gold standard?” With his remarks reverberating across much of the global media complex, it was a clear sign that in 2023, the world is ready to build on last year’s seismic trends and further accelerate the process of de-dollarisation as US policymakers continue to weaponise the use of their country’s currency.
Indeed, it was back in 1971 when US Secretary of the Treasury John B. Connally famously quipped that “the dollar is our currency, but it is your problem” to a room of European counterparts at a G10 (Group of Ten) meeting in Rome. But as that “problem” has become an existential issue for many countries 50 years later, the fear that an increasingly hostile US could line up any vulnerable country in its crosshairs has led to a global wave of de-dollarisation, one that has dramatically sped up since a barrage of economic sanctions were levied by US-led Western powers against Russia for its invasion of Ukraine.
De-dollarisation has thus become an entirely rational policy for many nations to pursue, particularly those that were previously beholden to the US currency and suffered disastrous consequences as a result. Whether it is the imposition of sanctions that obstruct a country’s access to dollars on international markets, the freezing of a country’s dollar-denominated assets held within Western apex financial institutions or the banning of a country’s banks from the dollar-denominated SWIFT (Society for Worldwide Interbank Financial Telecommunications) payment system, the keenness to de-dollarise has gathered pace this year as more countries seek to diversify their exposures into alternative currencies and investments.
As the global reserve currency, central banks across the world typically hold substantial quantities of dollar-denominated assets, including US Treasuries and corporate bonds. This privileged position enables the US to run up massive trade and government deficits. “For the United States, the money that is spent on running a balance-of-payments deficit on [the] military account and on American investors buying Chinese stocks and Chinese companies, dollars are recycled back to the United States to buy US Treasury bonds,” Michael Hudson, professor of economics at the University of Missouri–Kansas City and author of the book Super Imperialism – New Edition: The Origin and Fundamentals of U.S. World Dominance, explained in May 2020. “That is how the US balance of payments deficit serves to finance the domestic government budget deficit. The larger the US balance of payments deficit grows as the US spends more militarily and politically around the world, the more foreign central banks end up financing the domestic budget deficit.”
But over several decades, a consistent decline in the willingness of central banks to retain such high concentrations of dollar assets among their reserves has been clearly observed. In the late 1970s, the US dollar’s share of global reserve currencies stood at a mighty 85 percent. By the end of 2022, that share had fallen to just 58.4 percent, as per the International Monetary Fund’s (IMF’s) Currency Composition of Official Foreign Exchange Reserves (COFER) data. And although the IMF observed that share rising marginally to 59.02 percent in this year’s first quarter—and while it still dwarfs the next most liberally adopted currency, the euro, at 19.77 percent—few would argue that the US dollar’s share of reserves is on anything other than a downward long-term trajectory. Indeed, an 8-percent contraction was recorded across all reserves during 2022, with the 9-percent reduction in the US dollar throughout the year being the key contributing factor.
This reduction can be partly explained by changing preferences among leading central banks over the last few years, causing them to load up on gold whilst simultaneously moving away from the dollar. The World Gold Council’s (WGC’s) 2023 survey published on May 30 clearly underlined these trends, showing how particularly developing economies, such as China, India, Turkey and Egypt, have led the way in gold acquisition this year. The survey, which involved a total of 59 central banks, found that 71 percent of respondents expected global central bank gold holdings to rise in the next 12 months (compared to 61 percent in last year’s survey), while a similar proportion of respondents (24 percent versus 25 percent) stated they have plans to increase their own gold holdings in the next 12 months. Furthermore, 38 percent of the survey’s advanced-economy central bank respondents believed gold’s future share in global reserves would rise five years from now, considerably less than the 68 percent of emerging market and developing economy (EMDE) central banks.
And while the survey found considerable optimism over the outlook for the role played by gold within the world’s central banks’ reserves, it also uncovered even more pessimism over the dollar’s role than was found in previous surveys, particularly among the EMDE respondents. “Whereas 54 percent of advanced economy respondents think the US dollar’s share of global reserves will remain unchanged 5 years from now, only 20 percent of EMDE respondents share this view,” the survey found. “While 46 percent of advanced economy respondents believe the US dollar’s share of global reserves will fall, 58 percent of EMDE respondents believe it will do so.”
As central banks are demonstrating in 2023, trust in gold and a degree of mistrust in the greenback are underlying recent trends. And by demonstrating the most fervent appetite for additional gold—and the leastdesire for dollars—China is leading the way in this regard. Having raised its gold reserves for a ninth consecutive month in July by 23 tons, the official quantity of bullion now held by the People’s Bank of China (PBOC) sits at 2,137 tons, with around 188 tons having been added since the beginning of its bull run in November 2022. Meanwhile, the latest official US data for major foreign holders of Treasury securities to May 2023 shows a near-continuous dumping of China’s Treasury holdings to $846.7 billion from $951.8 billion a year earlier and well over $1 trillion at the beginning of 2022.
Such trends strongly imply that should the dollar eventually be knocked off its perch as the world’s leading reserve currency, gold will play a central role in this usurpation. And some even believe such a scenario could become a reality before too long. Goehring & Rozencwajg (G&R), for example, recently suggested that the dollar might be on the verge of losing its reserve-currency status, which the New York-based, natural-resources-focused investment firm contends would be the most impactful market shock of the last 40 years. As G&R managing partner Leigh Goehring observed, China has a closed capital account, and the countries trading in the renminbi cannot exchange it, so gold can solve many problems. “How in the world would you ever be able to exchange renminbi? They’re talking about eventually settling it all up with gold,” Goehring told metals authority Kitco News in June. “Any move by China to displace the U.S. dollar as a reserve currency must include some degree of gold convertibility. Foreign holders could then convert some portion of their trade surplus from renminbi into gold via the Shanghai gold exchange.”
And with central banks now buying more gold than at any time since at least the 1950s, when such records began, as well as currently accounting for a record 33 percent of monthly global demand for gold, the chair of Rockefeller International, Ruchir Sharma, recently noted that this buying boom is not only pushing gold prices to near-record highs but also 50 percent higher than what models based on real interest rates would suggest. “Clearly, something new is driving gold prices. Look closer at the central bank buyers, and nine of the top 10 are in the developing world, including Russia, India and China,” Sharma wrote in an April 23 article for the Financial Times. “Not coincidentally, these three countries are in talks with Brazil and South Africa about creating a new currency to challenge the dollar. Their immediate goal: to trade with one another directly, in their own coin.”
Indeed, just as President Luiz Inácio-Lula da Silva openly questioned the dollar’s role during his landmark China visit, much of the world is now asking why bilateral and multilateral trade that does not directly involve the United States should require compulsory use of the dollar. As such, the greenback continues to play a more diminished role in global transactions and trade agreements between many countries. With China the leading global trading power today, moreover, the replacement currency in many cases involves the renminbi. Indeed, Brazil itself signed numerous agreements with Beijing in late March that will see the two BRICS (Brazil, Russia, India, China and South Africa) members conduct their massive trade of largely agricultural products, as well as financial transactions, by directly exchanging renminbis for reais and vice versa.
And perhaps the move with the most symbolic importance thus far regarding the likely future direction of global commodities trading was the completion of China’s first-ever yuan-settled LNG (liquefied natural gas) trade through the Shanghai Petroleum and Natural Gas Exchange (SHPGX) between national oil company CNOOC (China National Offshore Oil Corporation) and France’s TotalEnergies SE. The exchange’s chairman, Guo Xu, said the transaction promoted “multi-currency pricing, settlement and cross-border payment”, adding that the “financial infrastructure of cross-border yuan settlement” would provide “more convenient channels for domestic and international oil and gas resources”. CNOOC’s general manager, Yu Jin, meanwhile, acknowledged that yuan-based trade of global resources could “promote the globalisation of energy trading and build a more diversified ecology”. French economic news outlet La Tribune reported that TotalEnergies “simply explained that this unprecedented yuan transaction was ‘a request from CNOOC’ in a hydrocarbon market where purchases have long been settled in dollars”.
Given France’s position as a Western ally of the US, the landmark deal demonstrates that non-dollar bilateral trade within global commodity markets is possible—and perhaps even preferable—which, in turn, could lay the groundwork for more such trades to follow. Indeed, should it come to fruition, the biggest sucker punch to global dollar hegemony will come from the pricing of oil exports from Saudi Arabia and other important Western Asian countries in the yuan and other non-dollar currencies. The overwhelming majority of global transactions for oil and other major commodities are priced in US dollars, which means that to facilitate such transactions, substantial daily demand is required for the US currency—widely known as the “petrodollar” in this context.
In a landmark visit to Riyadh, Saudi Arabia, in December 2022, however, China’s President Xi Jinping suggested that China and Arab states use the Shanghai Petroleum and National Gas Exchange as a platform for facilitating the yuan-denominated settlements of oil and gas trades. “China will continue to import large quantities of crude oil from Gulf countries, expand imports of liquefied natural gas, strengthen cooperation in upstream oil and gas development…and fully use the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade,” the Chinese president reiterated during his visit.
While such an arrangement does not necessarily mean that barrels of oil originating from the Arab world are all about to be imminently priced in the Chinese currency, it provides yet another milestone along the de-dollarisation journey many countries are earnestly pursuing. And with Saudi Arabia seemingly on the verge of joining the BRICS economic grouping, which seeks to advance trade and cooperation among member nations, there is a sense of inevitability that non-dollar currencies will be used to price at least part of the Kingdom’s oil output before too long.
According to Ashok Swain, a professor of peace and conflict research at Uppsala University in Sweden, oil trade in the yuan will be a “huge step” for China and “a significant setback to the dollar’s standing”. Speaking to US-based Western Asia-focused news outlet Al-Monitor, Swain added, “There is no doubt that Saudi Arabia becoming a member of China-dominated SCO (the Shanghai Cooperation Organization) and BRICS+ would accelerate the bilateral trading being conducted using the yuan as the trading currency.”
Perhaps this explains the considerable efforts being made by the US to prevent Saudi Arabia from advancing its relationship with China. According to the Wall Street Journal (WSJ), which cited unnamed US officials, the Saudis have agreed to an initial broad proposal with the US to recognise the state of Israel in exchange for concessions to the Palestinians, US security guarantees and civilian nuclear help. “The officials said the US could seek assurances from Saudi Arabia that it won’t allow China to build military bases in the kingdom—an issue that has become a sore point between the Biden administration and [the] United Arab Emirates,” the WSJarticle published on August 9 reported. “Negotiators could also seek limitations on Saudi Arabia using technology developed by China’s Huawei and assurances that Riyadh will use US dollars, not Chinese currency, to price oil sales, they said. The US also is expected to look for ways to end the feud over oil prices driven by Saudi Arabia’s repeated production cuts.”
Should the US fail in its efforts to bring the Saudis back onside, particularly regarding the pricing of oil, the dollar’s share of global trade could end up taking a sizeable hit. Nonetheless, the US currency will likely remain the dominant pricing unit for international trade and financial markets for some time to come. As a June 2023 paper from the Federal Reserve (the Fed) noted, the dollar accounted for 96 percent of the trade invoicing in the Americas over the 1999-2019 period, as well as 74 percent in the Asia-Pacific (APAC) region and 79 percent in the rest of the world. Only in Europe does the euro lead the greenback with a 66-percent share. “In part because of its dominant role as a medium of exchange, the U.S. dollar is also the dominant currency in international banking,” the paper observed. “About 60 percent of international and foreign currency claims (primarily loans) and liabilities (primarily deposits) are denominated in US dollars. This share has remained relatively stable since 2000 and is well above that for the euro (about 20 percent).”
It is also the predominant and de facto currency for the world’s biggest and most liquid financial markets, including the largest stock and bond markets globally. Realistically, there are no viable alternatives to replace the dollar anytime soon, especially given that the renminbi still represents a diminutive share of global trade and its capital account remains closed due to restrictions placed on it by China’s government. And the dollar is still the de facto currency used within the world’s dominant payment network, SWIFT, which includes around 11,000 member institutions across 200 nations and territories and carries out more than 42 million transactions per day worth a daily average of almost $5 trillion.
But it should also be emphasised that for most countries, the intention, for now at least, is not to replace the US dollar as the world’s leading reserve currency. Rather, their main goal is to achieve sufficient diversification toward other forms of currency and stores of value so that should they be targeted by US-led punitive economic measures, alternatives would be available to them. As such, while the dollar is not about to be dethroned anytime soon, the steady shift toward other currencies will continue to eat away at its global influence for the time being, bolstering the prospects of true global multipolarity and offering much of the world potentially critical economic lifelines.