As some nations seek alternatives to the dollar, our visualisations explore how the global reserve currency is being displaced in some ways – and not at all in others.
“Why can’t we do trade based on our own currencies?” Brazilian President Luiz Inácio Lula da Silva recently remarked in Shanghai.
Lula’s proclamation made headlines as it amplified an issue that is resonating with policy makers from Washington to Beijing and is increasingly of interest to central bankers and financial strategists: the US dollar’s overwhelming dominance in global trade.
When Brazil exports soybeans to China, they are priced in dollars. (And China, like other dollar holders, tends to park the funds it receives in the US Treasury market – with its unrivalled depth and liquidity.)
This reflects the reach and staying power of the greenback’s post-WWII status as the world’s reserve currency. The prominent economist Barry Eichengreen, amongst others, argues that the US can run persistent current account and budget deficits more easily than any other nation. French Finance Minister (and later president) Valery Giscard d’Estaing described the situation as an “exorbitant privilege.”
Since Russia’s invasion of Ukraine last year, the de-dollarisation debate has become more acute due to the power the US has to extend its geopolitical reach with sanctions. The SWIFT global payments system disconnected Russian banks, and using dollars to settle Russian oil trades became more problematic for buyers.
So is the dollar’s global role shrinking in real time? We examine three ways in which the greenback’s role is potentially under threat from rivals like the euro and yuan.
Central bank reserves
Reliance on the dollar has been steadily declining by one measure: its share of global foreign-exchange reserves held by central banks. These institutions hold massive amounts of various currencies to ensure the flow of trade and support their nation’s own currency.
As our chart of IMF data shows, the dollar remains by far the main currency of choice, but its share has dropped to 58 percent from 70 percent over the past 20 years.
The euro’s share grew in the 2000s before retreating; it’s back at about 20 percent.
The “other” category, including currencies from Australia, Canada, South Korea and the Scandinavian nations, is also gradually inching higher. IMF economists have posited that these currencies are considered as safe as the dollar, but offer higher returns than the greenback.
What about China’s yuan? Central bank holdings of the renminbi have been increasing, but from a tiny base, and now stand at 3 percent.
Swap lines (which let central banks exchange one another’s currencies) are also worth watching. Bloomberg News recently reported that the use of Chinese yuan in foreign-exchange swaps underwent the second-largest quarterly surge at the end of March.
China is keen to internationalise the use of its currency, but capital controls have stood in the way. The yuan cannot flow freely in and out of the country.
However, there are offshore yuan markets in financial centres such as Hong Kong, and China has been working on an alternative to the SWIFT system to make it easier for other countries to use renminbi. How is it doing?
A “SWIFT” for the yuan?
The next chart tracks use of the CIPS (the Cross-border Interbank Payment System). This SWIFT-like system lets participants clear and settle trades in yuan. It’s used by Chinese companies and institutions, but international banks like HSBC and Standard Chartered are also involved. CIPS says it has 80 “direct participants” and 1,357 “indirect participants” based in more than 100 countries.
China introduced CIPS in 2015 after Russia was sanctioned by the US and EU following its annexation of Crimea, complicating the use of the dollar in Russian oil exports.
The value of CIPS receipts and payments in renminbi (or yuan) terms has been gradually rising, as the bars show; the number of transactions, as measured by the left-hand axis, has surpassed 1 million per quarter.
CIPS processed about USD 14 trillion in transactions in 2022, a 21 percent increase.
The second panel of our chart tracks the Renminbi Globalisation Index. The RGI, compiled by Standard Chartered, measures the overall growth in offshore yuan use. (Its methodology can be accessed here.)
After declining in the first two years after CIPS was created, the RGI has steadily moved higher since 2018.
Back to SWIFT (otherwise known as the Society for Worldwide Interbank Financial Telecommunication). This Brussels-based payment network still dwarfs CIPS; it’s estimated to process more than USD 150 trillion in transactions per year.
It’s still King Dollar on SWIFT
This chart tracks different currencies’ share of global SWIFT payments over time. By this metric, the greenback’s importance has barely budged.
The dollar accounts for 40 percent of the value of transactions, about the same as a decade ago. The euro has occasionally challenged for the top spot, but has seen its proportion shrink of late.
Starting from a low base, China’s renminbi grabbed an increasing share of SWIFT payments in the mid-2010s, but that trend has leveled off.
What about the Russian ruble, at least before the recent round of sanctions? In December 2021, SWIFT says the Russian currency was used in just 0.2 percent of payments processed.
Speaking of the ruble, a high-profile recent impasse shows how sticky the greenback is, even for nations as hostile to the US as Russia.
Russia has long counted on India as a key market for its military equipment, and India is keen to import discounted Russian oil. However, New Delhi risks running afoul of US sanctions if it pays Moscow in dollars. And Russia has said it doesn’t want rupees. Pakistan faces a similar dilemma, and wants to pay in yuan, but Russian companies are reportedly not keen to accumulate Chinese currency that isn’t fully convertible.
“We need to use this money, but for this, these rupees must be transferred in another currency,” Russian Foreign Minister Sergei Lavrov said at a meeting of the Shanghai Cooperation Organization in Goa. “This is a problem.”
His remarks summarise the dilemma facing proponents of de-dollarisation. International trade naturally seeks a common unit of exchange. While the situation may change, the dollar has no obvious near-term alternative that can truly take on the currency’s unique role.