Originally published April 20, 2023 7:05 am PDT
The U.S. dollar is losing its power as a reserve currency at a pace that is going largely unnoticed by analysts, according to Stephen Jen, CEO and co-CIO of London-based asset manager Eurizon SLJ Capital.
Jen highlights that the greenback’s decline as a reserve currency has accelerated since last year, when it was used against Moscow as part of the sanction package following Russia’s invasion of Ukraine, according to a report from Kitco, an online platform that provides live gold and silver prices.
“The dollar suffered a stunning collapse in 2022 in its market share as a reserve currency, presumably due to its muscular use of sanctions,” Jen said.
Jen’s calculations reveal that the dollar’s share of official global reserve currencies dropped from 73% in 2001 to around 55% in 2021, and in 2022, it fell to 47% of total global reserves.
“Exceptional actions taken by the U.S. and its allies against Russia have startled large reserve-holding countries, most of which are from the Global South,” he said.
Countries have been prompted to seek currency alternatives for trade settlements and reserve build-up, as a result of the coordinated sanctions against Russia.
Jen explains, “What we witnessed in 2022 was sort of a ‘defund-the-global-police’ moment, whereby many reserve managers in the world disagreed with the conduct of both Russia and the U.S.”
Analysts aren’t noticing these changes because they typically use the nominal value of central banks’ dollar holdings in their calculations, which does not account for changes in the dollar’s price.
“Adjusting for these price changes, the dollar, we calculate, has lost some 11 percent of its market share since 2016 and double that amount since 2008,” Jen points out.
Countries such as China and Russia are leading the way in making bilateral trade agreements that exclude the U.S. dollar, Kitco points out, as the yuan recently surpassed the dollar in monthly trading volume for the first time, making it the most traded currency in Russia.
China has also completed its first yuan-settled LNG (liquefied natural gas) trade and struck a deal with Brazil to trade in their own currencies.
India and Malaysia have also abandoned trading in U.S. dollars, opting to settle in Indian Rupees.
