The US dollar is losing its grip on the world. In 2024, its share of global reserves fell to 59%, down from 72% in 2002. That’s a 13% decline over the past 22 years.
The numbers are clear: countries, especially those in the BRICS bloc, are distancing themselves from the dollar. Over the same period, the Chinese yuan has risen by 3%.
The US dollar has been the world’s leading reserve currency since World War II. Today, it still represents 58% of the value of foreign reserve assets. But a warning sign is in the offing.
The euro, next in line, is barely holding on to 20%. Recent global events, such as Russia’s invasion of Ukraine, have seen countries increasingly looking to diversify their reserve assets and reduce their reliance on the dollar.
BRICS and their de-dollarization
The BRICS countries have been the loudest in calling for the abandonment of the US dollar. Over the past two years, they have stepped up efforts to promote the use of their national currencies in trade.
In particular, China is making great efforts to expand its Cross-Border Interbank Payment System (CIPS).
The goal? To create an alternative financial infrastructure that does not rely on the dollar or SWIFT, the global financial messaging network.
CIPS is growing rapidly. Between June 2023 and May 2024, 62 new members joined the system, bringing the total number of direct members to 142 and indirect members to 1,394.
While SWIFT remains the big dog with over 11,000 connected banks, CIPS is making moves. China’s push to use the yuan in international transactions is a direct challenge to the dollar’s dominance.
And while the yuan’s share of global reserves has fallen slightly from 2.8% in 2022 to 2.3% in 2023, the de-dollarization movement is gaining momentum.
The BRICS countries are also exploring new payment systems that could further reduce their reliance on the USD. Discussions are underway on a potential intra-BRICS payment system.
This system could include cross-border central bank digital currencies (CBDCs) and currency swap agreements.
Is the dollar’s dominance really under threat?
The dollar is not going down without a fight. The Atlantic Council has concluded that the US dollar’s role as the world’s main reserve currency remains robust in the short to medium term.
The dollar continues to dominate foreign exchange reserves, trade accounts and global foreign exchange transactions. The euro, despite all efforts, poses no real threat.
The same goes for the yuan, at least for now.
The dollar’s dominance is not limited to reserve assets. It is deeply rooted in global trade and financial transactions. The USD remains the currency of choice for international trade settlements.
And while countries like China are pushing for alternatives, the infrastructure that supports the dollar is vast. That’s why the dollar remains strong in reserves, trade, and transactions, despite efforts to dethrone it.
Despite China’s best efforts, the yuan is still seen as a risky bet. Concerns about China’s economy, its stance on the Russia-Ukraine war, and growing tensions with the U.S. and the G7 have kept the yuan’s gains in check.
Reserve managers are being cautious, keeping the yuan’s share of global reserves relatively low even as China seeks wider international use.
Gold is also making a comeback. Almost a third of all central banks plan to increase their gold reserves in 2024. The 2022 sanctions against Russia have shown that even the euro carries geopolitical risks similar to the dollar.
This has led some reserve managers to turn to gold as a way to reduce the risk in their portfolios. While gold cannot replace the US dollar, it is becoming an important part of the equation as countries try to diversify their reserves.
So what does it take to be a reserve currency? Stability, liquidity, and trust. The USD has all of these in abundance, which is why it has held the top spot for so long.
The IMF’s special drawing rights basket includes the dollar, euro, yuan, yen and pound. Among them, the dollar still outperforms the others.
