The U.S. dollar continues to maintain its position as the world’s leading reserve currency. Despite efforts from various global players, neither the euro nor the BRICS countries have succeeded in De-Dollarization.
This is highlighted in a recent study by the Atlantic Council’s GeoEconomics Center, which underscores the dollar’s prevailing supremacy in foreign reserve holdings, trade invoicing, and currency transactions worldwide.
Insights from the Dollar Dominance Monitor
The Atlantic Council’s “Dollar Dominance Monitor” report emphasizes that the U.S. dollar’s dominance remains secure in the near and medium term.
The study points out that the dollar’s strong position is bolstered by the resilient U.S. economy, stringent monetary policies, and increased geopolitical risks.
These factors collectively reinforce the dollar’s outsized role in the global economy, despite economic fragmentation and the BRICS countries’ efforts to shift towards other international and reserve currencies.
Impact of Western Sanctions on BRICS Initiatives
The report notes that Western sanctions on Russia, imposed by the Group of Seven (G7) advanced economies following Moscow’s invasion of Ukraine, have accelerated BRICS countries’ attempts to develop a currency union.
However, the group has struggled to make significant progress on de-dollarization.
BRICS, an intergovernmental organization consisting of Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates, has found it challenging to move away from the dollar’s dominance.
China’s Efforts and Challenges
China has been proactive in supporting renminbi liquidity through swap lines with its trade partners.
The country’s Cross-Border Interbank Payment System (CIPS) saw a 78% increase in direct participants in the 12 months leading up to May 2024, totaling 142 direct participants and 1,394 indirect participants.
Despite these efforts, the renminbi’s share in global foreign currency reserves fell from its peak of 2.8% in 2022 to 2.3%.
The report suggests that concerns about China’s economy, Beijing’s stance on the Russia-Ukraine conflict, and potential risks associated with a possible Chinese invasion of Taiwan have contributed to reserve managers’ perception of the renminbi as a geopolitically risky reserve currency.
The Euro’s Waning Influence
Once considered a viable alternative to the dollar, the euro is now seen as a less attractive option.
The Atlantic Council’s report indicates that sanctions on Russia have exposed the euro to similar geopolitical risks as the dollar.
Additionally, concerns about macroeconomic stability, fiscal consolidation, and the lack of a unified European capital market have further diminished the euro’s role as a global reserve currency.
Intra-BRICS Payment System: Early Stages
The report mentions that negotiations around an intra-BRICS payment system are still in the early stages.
While bilateral and multilateral agreements within the group could eventually lay the groundwork for a currency exchange platform, these agreements are currently not scalable as they are negotiated on an individual basis.
Geopolitical and Economic Risks
The ongoing geopolitical tensions and economic risks play a crucial role in maintaining the dollar’s dominance.
The robust U.S. economy and tighter monetary policies make the dollar a safe haven for investors, especially during times of global uncertainty.
In contrast, the BRICS countries face challenges in creating a unified front to effectively counter the dollar’s supremacy.
The Role of Gold as a Safe Haven
As the euro’s influence wanes, those seeking to diversify their reserve holdings are increasingly turning to gold.
The report indicates that the perception of geopolitical risks associated with both the dollar and the euro has led reserve managers to favor gold as a safer alternative.
Future Outlook for De-Dollarization
While the BRICS countries continue to explore ways to reduce their dependency on the U.S. dollar, significant obstacles remain.
The Atlantic Council’s report highlights that, despite efforts to promote alternative currencies and develop new payment systems, the dollar’s entrenched position in the global economy is unlikely to be challenged in the near future.
Conclusion
The recent Atlantic Council report underscores the persistent dominance of the U.S. dollar in the global economy.
Despite concerted efforts by the BRICS countries and other international players to de-dollarize, the dollar’s role as the primary global reserve currency remains unchallenged.
Factors such as a strong U.S. economy, geopolitical risks, and the nascent stages of alternative payment systems contribute to the dollar’s continued supremacy.
As global dynamics evolve, the future of de-dollarization efforts will depend on the ability of emerging economies to navigate these complex challenges and establish viable alternatives to the U.S. dollar.