Sunday, April 23, 2023

Dedollarisation Gathers Pace As Biden's Administration Gathers Dust

 In spite of our resident money and finance expert, along with myself and other contributors regularly being described as anti - American clowns, employees of Vladimir Putin or Xi Jinping, Nazis, capitalist scum and a some rather more colourful things when we write about currency wars and the decline of the US$ as China, Russia, Iran and other emerging economies plot and conspire to replace the US$ as global reserve currency, de - dollarisation is a fact.  From Brazil to Saudi Arabia, and from India to Argentina, and increasing number of nations are 'reportedly' shifting away from the dollar hegemon.

The Dollar Index (or any other index tracking movements in the currency market) reveals an underlying trend. Year on year for the past decade the dollar's share of world trade is declining. This is a relative measure of course, US pseudo - patriots will be able to point to increases in the total amount of trade done in dollars, it's true. But the global economy is growing too, and the amount of trade done in dollars as a proportion of all international trade is steadily declining. 

Picture: Zero Hedge

The dollar's fecal emissions are some way from hitting any rapidly rotating wind turbine yet,  but Stephen Jen, a currency trading guru  who now runs money at Eurizon SLJ,  recently speelled out exactly how rapidly the de-dollarization is ocurring.

Jen, warned in a recent briefing, that the dollar is losing its reserve status at a faster pace than generally accepted, as many analysts have failed to account for last year’s frantic swings in exchange rates.

“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 and his colleague Joana Freire wrote.

“Exceptional actions taken by the US and its allies against Russia have startled large reserve-holding countries,” most of which are emerging economies from the so-called Global South, they said.

As this FT infographic illustrates,  if you adjust for price changes the dollar’s share of official global reserve currencies (values of a currency held by foreign governments,) has gone from about 73 per cent in 2001 to around 55 per cent in 2021.

Then, last year, it fell to 47 percent of total global reserves.

 Source: Eurizon SLJ Capital

More ominously, the USD is losing its market share as a reserve currency at a much faster rate than is commonly believed.

"After steady declines in its global market share for the past two decades, in 2022 the dollar lost market share at a pace 10 times as rapidly. Analysts have failed to detect this big change because they calculate the nominal value of the world’s central banks’ dollar holdings without considering the changes in the price of the dollar. 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.

This erosion in the USD’s reserve currency status has accelerated precipitously since the start of the war in Ukraine. Exceptional actions taken by the US and its allies against Russia have startled large reserve-holding countries, most of which are from the Global South.

...Without the need for us to take sides in this debate on Ukraine, it seems reasonable to speculate that the main driver of the collapse in USD’s reserve status in 2022 may have reflected a panicked reaction to property rights being jeopardised. 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 US."

To put it bluntly the greenback’s share in global reserves slid last year at 10 times the average speed of the past two decades as a number of countries looked for alternatives after Russia’s invasion of Ukraine triggered sanctions.

As any economist or corporate CFO will tell you there are two pillars that maintain the US dollar in is dominant position and thus prop up the entire American economy: its role as the reserve currency of choice, and its dominant use in global finance and trade. Investors far too often confuse these two different concepts.

Stephen Jen argues. "While the Global South seems unwilling to continue to hold dollar assets, they  have lacked the ability to divest from the US dollar as an international currency, particularly for financial transactions."

While it will be very difficult to overcome the strong network effects that have been behind the dollar’s international currency status, the bid led by China, Russia and Iran, now joined by Saudi Arabia, India and Brazil loks strong enough to be capable of doing just that.The key to topple the dollar’s throne as an international currency is predicated on the relative developments and stability in the various financial markets, but with China Russia and Iran having recently cooperated in launching the Petroyuan and announced plans for a gold backed reserve currency to rival the dollar the outlook is bleak for the world's more powerful economy and in the light of internal divisions and the loonytoons policies of the current government it is only likely to become bleaker.



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