General

Promote the development of international trade! In recent months, multiple economies around the world have launched intensive new measures to strengthen local currency settlement in cross-border trade and investment. Experts point out that the global trend of "de dollarization" is being driven by the risk factors of the US dollar and the development needs of each country. But it is still too early to assert the 'collapse of the US dollar'. In the future, with the deepening development of world multipolarity, countries will generate new demand for payment and settlement mechanisms in economic and trade cooperation, which is expected to promote the exploration of international currency diversification.

Multiple countries' distancing themselves from the US dollar

The Indian Foreign Ministry recently issued a statement saying that India and Malaysia have agreed to use Indian rupee for trade settlement. United Bank of India and others will provide support for this new mechanism. The report states that this move indicates India's willingness to take concrete measures to achieve "de dollarization" of its international trade.

Other major economies are also trying to settle in local currency. Recently, Agence France Presse reported that China and Brazil have reached an agreement to use the Chinese yuan or Brazilian real for settlement in bilateral trade between the two countries in the future, without using the US dollar as the intermediate currency. The Brazilian Trade and Investment Promotion Agency stated in a statement that it is expected to reduce costs and promote more bilateral trade and investment.

The meeting of ASEAN finance ministers and central bank governors was recently held in Indonesia. The top agenda of the meeting is to discuss how to reduce the dependence of financial transactions on the US dollar, euro, Japanese yen, and pound sterling, and shift towards settlement in local currencies. At the meeting, Indonesian President Joko Widodo also urged other ASEAN countries to use credit cards issued by local banks and gradually stop using foreign payment systems, including Visa and Mastercard in the United States.

Prior to this, Iraq, the second largest oil producer of OPEC, also announced new international trade settlement measures. According to Reuters, the Central Bank of Iraq stated on February 22nd that the country plans to allow the settlement of import trade from China in Chinese yuan for the first time. Previously, the country's trade with China had been settled in US dollars. The Iraqi Central Bank says the new regulations will improve Iraq's access to foreign exchange.

The Latin American region is also taking action. According to the Financial Times, in January this year, Brazilian President Lula and Argentine President Fernandez announced that the two countries would prepare for the creation of a common currency belonging to the Latin American region and invite other countries from the region to join in order to promote regional trade and reduce dependence on the US dollar.

In recent years, the call for global "de dollarization" has been increasing, and major economies, including developed and emerging market countries, have implemented "de dollarization" policies through innovative cross-border payment and settlement mechanisms, signing bilateral currency agreements, and promoting diversification of foreign exchange reserves.

In order to bypass the SWIFT US dollar settlement system, Europe launched the "Trade Transaction Support Tool" (INSTEX) in early 2019. In March 2020, Europe and Iran signed the first barter trade agreement under the INSTEX settlement mechanism. Currently, countries such as France, Germany, the United Kingdom, Belgium, Denmark, Finland, the Netherlands, Norway, and Sweden have all joined the mechanism.

In January 2022, Türkiye and the Central Bank of the United Arab Emirates signed a currency swap agreement worth 64 billion lira and 18 billion dirhams to promote bilateral trade in local currency. Last April, the Bank of Israel included the Canadian dollar, Australian dollar, Japanese yen, and Chinese yuan in its foreign exchange reserves for the first time. Previously, the country only held three currencies: the US dollar, pound sterling, and euro. Last July, the Iranian foreign exchange market launched the Iranian Riyal/Russian Ruble currency transaction. Subsequently, Russia also stated that it will gradually abandon the use of the US dollar in its trade with Iran. In January of this year, Saudi Arabia also stated at the Davos Economic Forum that it is open to settling trade in non US dollars.

As more and more countries consider distancing themselves from the US dollar, the proportion of global reserves in the US dollar is changing. According to data from the International Monetary Fund, as of the fourth quarter of 2022, the proportion of the US dollar in global foreign exchange reserves decreased to 58.4%, the lowest level since 1995.

The attractiveness of US dollar assets has also decreased. According to data from the US Treasury Department, major overseas holders of US bonds such as China, Belgium, Luxembourg, and France have recently continued to reduce their holdings of US bonds. According to Federal Reserve data, foreign investors' holdings of US Treasuries decreased by $76 billion in the week ended March 22, the largest weekly decline since March 2014. A recent report released by the US Treasury Department also shows that in January this year, at least 16 countries around the world sold US bonds.

Multiple factors working together

Many analysts point out that the indiscriminate application of financial sanctions by the United States is a direct factor in the acceleration of global "de dollarization".

Former Assistant Treasury Secretary Paul Craig Roberts recently stated that after World War II, US hegemony had relied on the US dollar as a global reserve currency, and recent financial sanctions by the US have proven that the US dollar is no longer safe. The International Banker magazine recently reported that considering that about 1/4 of the global population is directly affected by US financial sanctions, the trend of "de dollarization" around the world may not be so surprising.

Cui Jianjun, a professor at the School of Economics and Finance at Xi'an Jiaotong University, stated in an interview with reporters that since the Ukrainian crisis, some countries led by the United States have launched multiple rounds of financial sanctions against Russia. The most severe sanctions include two measures: firstly, freezing half of Russia's foreign exchange reserves, with a total amount of approximately 300 billion US dollars; The second is to kick major Russian banks out of the SWIFT settlement system. These serious violations of the rules of the free market economy and the "weaponization" of the US dollar have caused panic in various countries and become the trigger for the current global wave of "de dollarization".

The irresponsible monetary policy of the United States has also forced many countries to explore countermeasures. Cui Jianjun stated that since March last year, the Federal Reserve has ended its loose monetary policy and shifted towards aggressive interest rate hikes, causing turmoil in the international financial market. Many developing countries are facing severe inflation, currency depreciation, and capital outflows. In fact, reducing their holdings of US dollar treasury bond bonds and promoting the diversification of foreign exchange reserve assets are also the helpless self-help actions of these countries to deal with the spillover of US financial risks.

The United States has been manipulating the US dollar to harvest the world and continuously depleting its credit base, "Cui Jianjun said

Guo Hongyu, a professor at the School of Finance at the University of International Business and Economics, stated in an interview with our reporter that in addition to external factors being "forced", the internal development needs of emerging market countries are also driving countries to actively explore the establishment of local currency trading mechanisms.

The trend of 'de dollarization' is in line with the multipolarization of the world. Currently, emerging market countries are increasingly emerging, and their willingness to expand multilateral and regional trade cooperation is constantly increasing. In this process, there is inevitably a demand for cross-border payment and settlement mechanisms within their own countries and regions. As these countries' foreign trade volume and payment and settlement needs further increase, the construction of financial infrastructure based on domestic currency payments will also accelerate Guo Hongyu said, In addition, for economies with close trade exchanges and high complementarity within the region, using local currency settlement has a natural advantage. Using local currency settlement not only saves the exchange cost of third-party currencies and avoids the impact of third-party currency exchange rate fluctuations on trade, but also helps reduce uncontrollable factors such as fluctuations in the number of third-party currencies. This is one of the main reasons why many countries are willing to negotiate and reach bilateral currency agreements at present 。”

Exploration and acceleration of currency diversification

With the increasingly significant trend of "de dollarization", some argue that the hegemony of the US dollar is coming to an end. American economist John Carney recently warned that the US dollar may soon lose its "strength" and its dominant position is gradually weakening. The US magazine 'Business Insider' also published an article stating that the dominant position of the US dollar in global trade faces' enormous challenges'.

However, more analysis suggests that it is too early to "challenge the US dollar" at present, and the process of "de dollarization" still needs to be objectively viewed.

US investment firm Carson Group recently analyzed that the dominant position of the US dollar as the world's reserve currency will not change in the short term, especially in the absence of strong alternatives.

At present, the US dollar still ranks first in global trade settlements, central bank foreign exchange reserves, global debt valuation, and global capital flows. Although the US dollar's position in the global monetary system has continued to decline in recent years, its position as a world reserve currency may not be quickly replaced, "said Cui Jianjun.

Currently, the US dollar still firmly occupies the two cornerstones of oil and gold, and the global market still has a strong path dependence on the US dollar in international trade settlement, cross-border payments and financing, "Guo Hongyu said.

But at the same time, some new explorations cannot be ignored. Recently, Goldman Sachs stated in a research report to clients that the rise of cryptocurrencies has prompted central banks around the world to try to use digital currencies to achieve dollar decentralization.

As early as May 2020, the Swedish central bank announced that it would use digital cryptocurrencies anchored to its domestic currency to support financial settlement and use blockchain technology to support de dollarization. Last February, the Russian Central Bank also announced the start of testing the digital ruble. Last May, the Bank of Japan released a report stating that Japan's digital currency plan had entered the second testing phase. In addition, the Ministry of Finance and the Department of Finance of Japan, in collaboration with several major banks, plan to lead the establishment of an international settlement system similar to SWIFT. Last November, the Egyptian Central Bank announced that the Egyptian pound would soon be decoupled from the US dollar, while initiating a series of monetary policy reforms to "de dollarize" the foreign exchange sector.

A multipolar currency world may arrive faster than imagined, "wrote Gillian Tate, a columnist at the Financial Times in the UK. Credit Suisse said in a report in February this year that there is evidence that major central banks around the world are diversifying their investments and reducing their dependence on the US dollar. The world is gradually moving towards a more multipolar monetary system.

In the future, the diversification of the international monetary system depends on the balanced development of the global economy. One possible prospect is that the US dollar will continue to play a role as an international reserve currency, but its weight will continue to decline; the status of the euro will gradually rise as the EU promotes economic and financial autonomy; and Asian countries will gradually explore the establishment of a new monetary order as their economic strength further rises, contributing to the diversification of the international monetary system. "Cui Jianjun said.

The development of currency is closely related to trade, "Guo Hongyu said, A strong trade alliance will inevitably generate an inherent demand for monetary cooperation. In this regard, the eurozone is a typical representative. The birth of the euro provides monetary convenience for regional trade exchanges among eurozone member countries, promoting the development of international trade. Nowadays, the euro with physical currency has become an advanced form of regional monetary cooperation, becoming the world's second largest reserve currency. Currently, in addition to the eurozone, Southeast Asia, Latin America, and other places The economic development and trade cooperation of the region are also constantly advancing. In the future, with the deepening development of world multipolarity and economic globalization, it is not ruled out that these regions may generate some new monetary cooperation arrangements