5 myths about dedollarisation: The most popular misconceptions of this theory
Economists explain why the news of the dollar's death is overly exaggerated
Leaders of China, Brazil, and even France have announced their intentions to reduce their dependence on the US money. This has given rise to a flurry of predictions that the yuan or the BRICS currency might displace the dollar from international reserves and trade calculations, causing a catastrophe in the US economy. However, experts assure that nothing of the sort will happen in the near future.
Mind suggests finding out how currency analysts debunk the five popular myths about dedollarisation.
Myth 1. Central banks are getting rid of the dollar as a reserve currency
"I'm confident that the gross abuse of the dollar as a global reserve currency will lead to its role weakening, falling, and more and more countries, even those not affected by American sanctions, will avoid the dollar just in case," lavrov stated in August 2022.
However, statistics by the International Monetary Fund show that the dollar's share of the $12 trillion in international currency reserves is stable. In 2022, it fell slightly from 54.8% to 54%, but the "green-back", as before, dominates over the euro, which accounts for 19% of reserves, the Japanese yen (5%) and the British pound (4.5%).
Myth 2. The dollar is losing its leading role in global trade
Elon Musk, one of the world's wealthiest people, scares the American public with the fact that countries plan to abandon the dollar in their trade agreements.
"Serious issue. US policy has been too heavy-handed, making countries want to ditch the dollar. Combined with excess government spending, which forces other countries to absorb a significant part of our inflation," Elon Musk posted on his Twitter.
This statement is also refuted by statistics. According to the Bank for International Settlements (BIS), of the 7.5 million currency transactions that took place daily in April 2022, in 6.6 million cases one or both parties to the deal used dollars. That is, the American currency plays a role in 88% of all global trade.
This indicator has not left the narrow corridor of 85-90% for several decades, despite the fact that some governments have focused efforts on refusing to use the dollar.
Experts say that organisations continue to conduct transactions in US currency because the dollar is universally recognised, relatively stable and eliminates additional transaction costs. Convincing trade participants to change currency is as difficult as persuading people to buy goods not with money, but with gift certificates issued by stores. Few would agree to give up cash because you can buy things with it everywhere. But with a gift card – only in certain places.
"For the last 35 years, the dollar share hasn't changed. I think the amount of political rhetoric has heated up tremendously, but people's actions haven't changed." Business Insider quotes Jay Zagorsky, a professor of economics at Boston University, as saying.
Myth 3. The Chinese yuan is a serious threat to the dollar
President of the PRC Xi Jinping successfully persuades global energy suppliers to accept payment in Chinese currency. His December visit to Saudi Arabia marked the "birth of petroyuan", according to Credit Suisse analysts. And in March 2023, journalists talked about the beginning of the "yuanisation of Europe", after the French TotalEnergies made a historic sale of 65,000 tonnes of liquefied gas to China for yuan.
In April, following a meeting with Xi Jinping, French President Emmanuel Macron stunned journalists with a statement that Europe must reduce its dependence on the US and the dollar. This finally convinced analysts that the yuan will rise from the fifth position in the international monetary hierarchy. But its maximum is third place after the dollar and euro.
"Can I see the Chinese currency surpassing the larger British pound? Yes. And I see that the yuan can potentially surpass the Japanese yen. Yes. But it needs to make a very long jump from China to the top to beat the euro and beat the dollar," Business Insider quotes Jay Zagorsky's reasoning..
According to the IMF, last year only 2% of all currency reserves were in yuan, and almost a third of this volume belonged to russia. According to BIS, the yuan was used in only 7% of all international foreign currency transactions, significantly lagging behind the 31% in euros and 88% in dollars (as transactions can include two currencies, the percentage shares in total exceed 100%).
Analysts, say that most international organisations will not want to transfer their reserves to yuan because of the poor convertibility of this currency, the regulated economy of China, and negative expectations regarding the exchange rate. Buying yuan in large quantities is easy, but selling is much more difficult. Moreover, the world has become convinced that the PRC authorities are artificially devaluing the yuan against the dollar and are unlikely to abandon this practice.
Myth 4. A new composite currency will replace the dollar
Countries dissatisfied with the dollar should unite and create an alternative currency. This is urged by Brazilian President Lula da Silva, who asserts that a strong alternative to the dollar could be created by the BRICS block (Brazil, russia, India, China, and South Africa) in conjunction with the MERCOSUR trade bloc (Brazil, Argentina, Paraguay, and Uruguay).
"If it were up to me, we would always trade with other countries in national currencies, so as not to be dependent on the dollar. Why not make an attempt to create a common currency for MERCOSUR countries or for BRICS countries?.. I believe that over time, we will come to that. I believe this is necessary because many countries face challenges buying dollars," Lula da Silva stated in January 2023.
Economists call such statements "grumbling" from countries dissatisfied with the low status of their currencies. As Christian Le Miere, founder of the London consulting firm Arcipel, points out, there already is a strong composite currency in the market – the euro. However, it is not displacing the dollar because it belongs to a diverse group of 20 countries, which, due to different fiscal policies and debt sizes, experienced a serious debt crisis a little over 10 years ago.
"There is little chance the euro will be seen as a viable alternative any time soon. And if that is true of the euro, imagine how much truer it would be of a BRICS currency, a fanciful idea that would attempt to unite widely divergent economies into a monetary union with little fiscal or political unity," Christian Le Miere speculates.
Myth 5. Displacement of the dollar by a rival currency will cause a catastrophe in the US economy
"Some of it, I think, is coming from Putin sympathisers, who want us to believe that America will be punished for, as they see it, “weaponizing” the dollar against the invasion of – I mean, special military operation in – Ukraine.… But recently, international relations experts, like Fareed Zakaria, have begun to warn that the dollar is a superpower that we risk losing. Even economic analysts, like Michael Pettis, seem to believe that dollar dominance is the only thing helping the States cope with a large annual trade deficit," Paul Krugman expresses indignantly.
However, in his opinion, the importance of control over the global reserve currency is greatly overestimated. There are no "pipelines" that connect dollars in the accounts of international organisations with the US economy. Therefore, money cannot spill out from other countries and flood the financial system of the States.
"What business is it America’s in what currency is specified in the contract of Chinese exporters and Brazilian importers: dollars, yuan or reais?" Paul Krugman ponders. "Much of what is written on this topic starts with the assumption that the special role of the dollar endows the US with a unique ability to patch a huge hole in the balance of payments annually, as the status of the dollar prompts other countries to accept our money. But just look at the IMF data to see the fallacy of this assumption. We're not even at the top of the table of countries with the largest deficits."
The United Kingdom, Australia, and Canada patch even larger holes in their balance of payments annually than the US. Meanwhile, the Australian and Canadian dollars have never been widely used beyond their own countries. And while the UK had its own dominant currency, the pound stopped playing an important international role a few generations ago. The UK weathered this without any upheavals.
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