Why the US Dollar Won’t Bow Out – The Diplomat

The world of international finance has been abuzz with discussions of de-dollarization. Recent events such as the BRICS expansion and increasing narratives hinting at the decline of the U.S. dollar’s dominance in global trade have dominated news headlines.

But if one digs deeper beyond the sensationalism and examines the empirical evidence, the longevity of the U.S. dollar’s dominance becomes apparent. It will continue to play a central role in global finance.

Recent news from the BRICS summit in South Africa has ignited a renewed debate on de-dollarization, especially with Saudi Arabia, a major oil producer, joining the club. The energy dominance of BRICS seems to be on an upward trajectory, with its members accounting for an estimated 42 percent of global crude oil output once the announced new members – Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the UAE – are incorporated.

The question then emerges: Is the U.S. dollar’s dominance waning?

Let’s dig a little deeper into the dynamics. Saudi Arabia, for instance, is responsible for over 17 percent of global crude oil exports, most of which head toward Asia, particularly BRICS nations China and India. With BRICS pushing for de-dollarization, speculation is rife that Saudi Arabia may switch to non-dollar-denominated currencies for its oil trade, particularly with these two nations.

However, the Saudi riyal’s peg to the U.S. dollar has been a formidable barrier against such a shift. Moreover, despite the clamor, concrete steps toward such a switch have been sparse.

It’s also crucial to note that energy constitutes merely 15 percent of global trade. Even if Saudi Arabia were to alter its oil export invoicing, it’s unlikely to signal the end of the dollar as the favored international currency. Moreover, the increasing trade interconnectedness between the core and newly invited BRICS nations suggests that economic motivations, rather than just a push for de-dollarization, are at the heart of these alliances.

JPMorgan, one of the most respected names in global finance, has flagged signs of de-dollarization. Yet, its analysts also maintain that the dollar’s hegemony ultimately remains unthreatened in the foreseeable future. To understand this seeming paradox, we need to sift through the nuanced intricacies of their observations.

While the dollar’s share in foreign exchange trading volumes stands impressively at 88 percent, and its role in trade invoicing remains stable, its portion in central bank reserves worldwide has declined to a record low of 58 percent. However, this is still a lion’s share when compared to other global currencies. Even as the BRICS nations, motivated in part by geopolitical tensions such as the Ukraine conflict, make concerted efforts to bypass the dollar in trade, the dollar’s overarching influence remains largely intact.

There are simply few alternatives to the U.S. dollar. China’s yuan, for example, constitutes a meager 7 percent of foreign exchange trading volume. The drive to internationalize the yuan, a potential successor to the dollar, faces significant barriers like China’s capital controls. Meanwhile, the euro’s share has dwindled, mostly attributed to a decade of ultra-low interest rates.

The recent 14th summit of the BRICS nations cast a revealing light on the challenges facing de-dollarization. Hopes of a common currency, which would have been a bold step toward reducing the dollar’s centrality, seemed to be shelved, at least for the time being. South Africa’s finance minister told reporters that “no one had tabled the issue of a BRICS currency, not even in informal meetings,” as doing so would involve “losing independence on monetary politics.”

Instead, BRICS’ emphasis was placed on bilateral clearing, which is fraught with its own set of challenges. Inherent problems arise with bilateral trade settlements. Imbalances in trade, which are inevitable over time, necessitate conversion into a universally accepted currency – precisely why the U.S. dollar is so widely used to begin with.

As highlighted by Russian frustrations over receiving payment in Indian rupees for oil exports, conversion challenges are evident when settling trade in local currencies. China, with its vast economic clout, could step in as the “BRICS paymaster,” but this poses its own set of problems, especially when it comes to liquidity support for countries in distress.

While the discourse around de-dollarization gains momentum, particularly with the strategic expansion of BRICS, the U.S. dollar’s preeminence remains largely unchallenged. Economic realities, intertwined geopolitics, and the sheer inertia of existing financial systems ensure the dollar’s place remains secure, at least for the foreseeable future. The ebb and flow of global currencies will always persist, but pronouncing the decline of the dollar seems premature at best.