The decline of the US dollar as a global reserve currency has been a common topic of discussion for years, especially after the global financial crisis of 2007-2008. While talk of its imminent demise may be exaggerated, data provided by the Atlantic Council shows that the world is using the US dollar far less than it was at the turn of the century.
According to the Atlantic Council’s Dollar Dominance Index, the dollar’s share of global reserves was 58% in 2024, down 14% from 2002, when it accounted for 72% of global reserves.
“The US dollar has been the world’s leading reserve currency since World War II,” the report said. “Today, the dollar accounts for 58 percent of the value of foreign reserves globally, while the euro, the second most used currency, accounts for about 20 percent of foreign reserves.”
“But in recent years, especially since the Russia invasion of Ukraine and the escalation of the use of financial sanctions by the Group of Seven (G7), some countries have begun to signal their intention to diversify away from the dollar,” the council’s researchers said.
Meanwhile, the pace of dollar-dedependency has accelerated in recent years, with researchers pointing to one development that has accelerated this trend: the growth of the BRICS group.
“Over the past twenty-four months, the BRICS countries (a group of Brazil, Russia, India, China and South Africa, to which recently Egypt, Ethiopia, Iran, the United Arab Emirates and the United Arabic Arab Emirates have been added; Saudi Arabia is considering joining) have been actively promoting the use of national currencies in trade and transactions,” according to the report. “During this period, China has been expanding its alternative payment system with its trading partners and seeking to increase the use of the international yuan.”
“The BRICS project is a potential challenge to dollar status due to individual members indicating their intention to trade more in national currencies. Among the BRICS currencies, the yuan has the greatest potential to compete with the dollar as a trading and reserve currency.’
Strength of financial infrastructure
Two key indicators were identified in the report that point to the strength of China’s alternative financial infrastructure: “China’s barter lines with BRICS countries and membership of China’s Cross-Border Interbank Payments System (CIPS),” the researchers said.
The researchers found that between June 2023 and May 2024, “the CIPS system added sixty-two direct participants for a total of 142 direct participants and 1,394 indirect participants.”
However, “SWIFT remains the dominant player by a wide margin, with more than 11,000 connected banks,” according to the report. But since direct CIPS participants can liquidate transactions without relying on SWIFT or the dollar, traditional indications of yuan usage may be incomplete.
Although China is making progress in adding partners to the CIPS system, the researchers noted that “the dollar’s role as the world’s main reserve currency remains safe in the near and medium term.”
“The dollar continues to dominate foreign exchange reserves, commercial billing and currency transactions globally. All potential competitors, including the euro, have a limited ability to challenge the dollar in the near future,” according to the Atlantic Council report.
As for the development of a payment system within the BRICS, the Atlantic Council found that negotiations on such a
4, “the CIPS system added sixty-two direct participants for a total of 142 direct participants and 1,394 indirect participants.”
However, “SWIFT remains the dominant player by a wide margin, with more than 11,000 connected banks,” according to the report. But since direct CIPS participants can liquidate transactions without relying on SWIFT or the dollar, traditional indications of yuan usage may be incomplete.
Although China is making progress in adding partners to the CIPS system, the researchers noted that “the dollar’s role as the world’s main reserve currency remains safe in the near and medium term.”
“The dollar continues to dominate foreign exchange reserves, commercial billing and currency transactions globally. All potential competitors, including the euro, have a limited ability to challenge the dollar in the near future,” according to the Atlantic Council report.
As for the development of a payment system within the BRICS, the Atlantic Council found that negotiations on such a system “are still in their early stages, but members have reached bilateral and multilateral agreements with each other, focusing on the central bank digital currency (CBDC) and cross-border currency exchange agreements.”
“It is likely that these agreements will be difficult to expand due to regulatory issues and market liquidity, but they may form the basis of a currency exchange platform over time,” the researchers said.
While China poses the greatest threat to the dollar’s standing, its recent problems, including the collapse of the real estate market, have led to the yuan losing some of the ground it has gained against the dollar in foreign exchange reserves.
“In the fourth quarter of 2023, the yuan’s share of global foreign exchange reserves fell to 2.3 percent from 2.8 percent in 2022, despite Beijing’s active support for yuan liquidity via swap lines,” according to the report. “Reserve managers may see the yuan as a geopolitically risky currency due to concern about China’s economy, Beijing’s stance on the Russian-Ukrainian war, and rising tensions with the United States and the Group of Seven.”
Based on the Atlantic Council’s ‘Six Core Qualities of a Reserve Currency’, the euro is best suited to become a reserve currency after the dollar, followed by the yuan.
Gold competes with the dollar
While other currencies struggled to gain ground against the US dollar, the Atlantic Council noted that one commodity gained support among BRICS members: gold.
“Emerging markets have been the driver behind the rally in recent gold purchases,” the report said. “Since 2018, all BRICS members have increased their gold holdings at a faster rate than the rest of the world, despite historically high prices.”
“Many advanced economies have accumulated significant gold reserves over centuries and held them over the course of the twentieth century to maintain the gold standard after the end of World War II,” the authors said. But recent surveys suggest that advanced economies are now planning to increase their gold holdings to hedge against risk.
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