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Signs of de-dollarization: JPMorgan points to FX reserves
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(Kitco News) With many, including the IMF's managing director, still not seeing a threat to the U.S. dollar's hegemony, JPMorgan outlined signs that de-dollarization is happening.
The fastest Federal Reserve's monetary policy tightening in decades, mixed in with aggressive use of sanctions, such as freezing Russia out of the global banking system, are pushing the BRICS nations (Brazil, Russia, India, China and South Africa) away from the dollar. And there is evidence of this, according to JPMorgan's strategists Meera Chandan and Octavia Popescu.
In a note on Monday, strategists said that even though the overall dollar usage is still within the historical range, its utilization is much more "bifurcated under the hood."
"De-dollarisation is evident in FX reserves where (the dollar's) share has declined to a record as share in exports declined, but is still emerging in commodities," the strategists said.
According to the note, the greenback's share of traded currency volumes is just below record highs, at 88%, while the euro's share fell to a record low of 31%, and the Chinese yuan's share climbed to a record high of 7%.
But looking closer at the use of the U.S. dollar, the situation is more complex. JPMorgan estimated that for global exports, the U.S. share is now at a record low of 9%, while China is at a record high of 13%.
Breaking down the global central bank FX reserves, the dollar's share is also at a record low of 58%. And when accounting for gold, which now accounts for 15% of reserves compared to 11% five years ago, that share is even lower.
At the same time, the internalization of the yuan has been limited, JPMorgan pointed out. According to the Wall Street giant, the "CNY" is only 2.3% of SWIFT payments compared to 43% for the dollar and 32% for the euro.
The People's Bank of China said that global central banks tapped a record amount of Chinese currency in foreign-exchange swap lines in the first quarter, with the outstanding balance of all foreign currency swaps at 109 billion yuan ($15.6 billion) at the end of March.
The theme of de-dollarization has been gaining traction this year, with former Goldman Sachs chief economist Jim O'Neill calling on the BRICS bloc to expand and challenge the dominance of the U.S. dollar.
And the BRICS members are doing just that with their calls for creating a common currency.
But not all see the U.S. dollar's hegemony as at risk. The International Monetary Fund's managing director Kristalina Georgieva told Bloomberg in May that she doesn't see a rapid shift in U.S. dollar reserves.
"We don't expect a rapid shift in reserves because the reason the dollar is a reserve currency is because of the strength of the U.S. economy and the depth of its capital markets, Georgieva said. "Don't kiss your dollars goodbye just yet."
But with the U.S. debt ceiling deal passing just before the deadline, many countries are reminded of the massive issuance of dollars, Sandeep Rao, head of research at Leverage Shares, told Kitco News.
"If the U.S. continues to print money and reduce purchasing power, it will lead to a fundamental change," Rao said. "Expenditures have outspent U.S. government revenues for some time. And more countries are choosing to buy gold to diversify."
To read more about emerging economies turning to gold as they move away from the U.S. dollar, click here.
