By Joseph Adinolfi
Defying expectations of ‘de-dollarization,’ the greenback climbed to its strongest level in a month on Friday
The sanctions imposed on Russia by the U.S. and European nations in response to the invasion of Ukraine in February 2022 were expected to weaken the dollar’s grip on the global financial system, according to some economists.
But that hasn’t happened. Instead, the greenback is just as dominant now as it was two years ago, if not more so, according to data from an academic paper published on Friday.
In the paper, titled “De-dollarization? Not So Fast,” economists Felix Gerding and Jonathan Hartley present evidence suggesting that the latest round of speculation about the decline of the U.S. dollar’s role in the international financial system has been mostly unfounded.
One year ago, expectations for de-dollarization were growing, driven by the expected backlash from the U.S. freezing Russia’s foreign-currency reserves, as well as the implications of a 2023 bilateral trade agreement between China and Brazil that was supposed to make both countries less dependent on the greenback.
See: Big question with dollar under fire from rival countries and currencies: What happens to markets if the greenback loses its dominance?
Yet despite all the hype, the dollar doesn’t appear to be any closer to ceding its status as the world’s de facto reserve currency, according to the data included in the five charts below. In fact, some of the data show the dollar’s role in the global economy has actually expanded over the past two years.
Share of foreign central-bank reserves unchanged since start of war
U.S. dollars and U.S. dollar-denominated assets, primarily Treasurys, still make up the largest share of foreign-currency reserves held by central banks around the world. That hasn’t changed much since the start of the war in Ukraine, according to data sourced from the International Monetary Fund.
Data show that the share of foreign-currency reserves allocated to dollars has been roughly steady over the past two years. Believers in the de-dollarization narrative often highlight the fact that the dollar’s share has declined from 70% in 1999 to 60%, according to the most recent available data.
But Gerding and Hartley found that the buck’s share of reserves is higher today than it was in 1990, raising questions about the notion that de-dollarization will likely be a gradual process that plays out over the coming decades.
Furthermore, even though the dollar’s share of central-bank reserves has declined since 1999, no single currency has emerged as the primary beneficiary.
Instead, the euro remains a distant second, as central banks appear to be diversifying their assets into a broader group of currencies, including the Australian dollar and Canadian dollar.
While some believed the war in Ukraine would spur demand for more Chinese yuan by central banks, the Chinese currency’s share of global reserves has actually shrunk since 2022, data show.
Dollar dominates foreign-exchange trading
Other data suggest that the dollar’s position has actually become more entrenched over the past two years.
The U.S. dollar is involved in nearly 90% of all foreign-exchange transactions, according to data collected by the Bank for International Settlements in a survey conducted every three years. That is higher than its share from 30 years ago, which was closer to 80%.
The latest installment of the survey was released in 2022 and thus would have shown if the invasion had dimmed demand for dollars, the paper’s authors said.
Nearly half of all global debt denominated in dollars
Another area where the role of the greenback has actually expanded since 2022 is the share of global debt denominated in dollars.
Using data from a number of sources, including the IMF, the BIS, Euroclear, Thomson Reuters and others, the paper’s authors found that the buck’s share of global debt markets has climbed to 45%, up from around 40% in early 2022.
Dollar’s role in trade invoicing has held steady
Finally, the dollar’s role in trade invoicing has held steady, according to data collected by the paper’s authors from central banks, finance ministries and government agencies of major trading nations.
The U.S. dollar’s share of imports remains at around 50%, while its share of exports has declined slightly to around 35%.
In terms of the dollar’s performance, the currency has seen its advance accelerate after a lackluster start to the year.
The ICE U.S. Dollar Index DXY, which tracks the buck’s performance against six of its main rivals, was up 1% on Friday to trade at its strongest level in more than a month, according to FactSet data. It has gained more than 8% since the invasion of Ukraine began in February 2022.
-Joseph Adinolfi
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03-23-24 0600ET
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