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Why isn’t de-dollarization taking off (yet)?

Why isn’t de-dollarization taking off (yet)?
Why isn’t de-dollarization taking off (yet)?

The dollar dominates unchallenged as reserve currency at a global level and, for now, attempts to weaken its global role do not seem to have had any significant effects.

The latest study to confirm the solidity of the US currency is by Atlantic Council GeoEconomics Center. The “Dollar Dominance Monitor”the title of the report, highlighted that the greenback continues to remain the king of foreign exchange reserves, trade invoicing and transactions globally and that its role as the main global reserve currency is strong in the short to medium term.

Neither the euro, nor the so-called BRICS countries – who have long been discussing a new currency to replace the dollar – have been able to reduce global dependence on the greenback. There de-dollarization which is being talked about more and more often in a context of global fragmentation and new balances of power, is slow to take off, according to the data collected.

The dollar is unrivaled as a reserve currency

According to the Atlantic Council report, the dollar’s dominance over other world currencies is solid and has found strength recently thanks to the robust American economyat the Fed’s more restrictive monetary policy and increasing geopolitical risks.

In reality, economic fragmentation also triggered the push for the BRICS countries to move towards other international markets and other currencies, but with limited and non-persistent effects at the moment.

In fact, the study claims that the Western sanctions on Russia imposed by the G7 on advanced economies after Moscow’s invasion of Ukraine accelerated the BRICS group’s efforts to develop a monetary union, but the group was unable to make progress in de-dollarization.

The same euro failed to emerge in the currency landscape. According to analysts, the community currency, once considered a competitor to the international role of the dollar, is also weakening as an alternative currency. It is no coincidence that investors looking to reduce their risk exposure are increasingly turning to gold and not the euro.

The study highlighted that Russian sanctions made it clear to reserve managers that the euro is exposed to geopolitical risks similar to those of the dollar. Concerns about macroeconomic stability, fiscal consolidation and the lack of a European capital markets union also harm the currency’s international role.

Finally it was observed that the China actively supported the liquidity of the renminbi through swap lines with its trading partners, but its share of global foreign exchange reserves has fallen to 2.3% from a peak of 2.8% in 2022.

“This is likely due to reserve managers’ concern about the Chinese economy, Beijing’s stance on the Russia-Ukraine war, and a potential Chinese invasion of Taiwan all contributing to the perception of the renminbi as a geopolitically risky reserve currency.”we read in the study.

There de-dollarization it could materialize in a future that cannot yet be estimated. However, it seems unthinkable to oust the greenback from its role. A declining West, more wars, the rise of Asian powers and China may chart a new course towards a weakening dollar or currency fragmentation. But actual results seem distant.


 
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