US Dollar Risks Mount as Threats to Market Dominance Grow

US Dollar Risks Mount as Threats to Market Dominance Grow
U.S. dollar notes are seen in this illustration on Nov. 7, 2016. (Dado Ruvic/Illustration/File Photo/Reuters)
Andrew Moran

Risks for the U.S. dollar are mounting, leaving some market analysts to ponder whether greenback hegemony is coming to an end or merely facing hurdles that the currency will eventually overcome.

For now, the consensus is that the dollar is still king, although multiple threats are forming that could undermine the buck’s dominance in global financial markets and the worldwide economy in the years to come.

Data from the International Monetary Fund’s (IMF) Currency Composition of Official Foreign Exchange Reserves (COFER) show that the U.S. dollar is still the preferred currency for countries worldwide, but others are increasing their presence in international reserves.

In the fourth quarter of 2021, the dollar represented 82.5 percent of total international reserve currencies. However, quarter-over-quarter, the dollar’s share of reserves dipped nearly 0.01 percent to $7.087 trillion.

Currency experts believe the IMF’s next COFER update will highlight an increase in the U.S. dollar due to renewed safe-haven demand.

The U.S. Dollar Index (DXY), which gauges the greenback against a basket of currencies, has surged 4.5 percent year-to-date. The index also has spiked about 10 percent over the past 12 months.

Euro, Hong Kong dollar, U.S. dollar, Japanese yen, British pound, and Chinese 100 yuan banknotes are seen in this picture illustration, on Jan. 21, 2016. (Jason Lee/Illustration/Reuters)
Euro, Hong Kong dollar, U.S. dollar, Japanese yen, British pound, and Chinese 100 yuan banknotes are seen in this picture illustration, on Jan. 21, 2016. (Jason Lee/Illustration/Reuters)
A broad array of issues has become ubiquitous in the global economy, forcing investors to flee to conventional safe-haven assets, including the dollar. From geopolitical disputes in Eastern Europe to the supply chain crisis, markets are monitoring a myriad of developments that are likely to affect the international economy.

The Rise of the Yuan

But while the UK pound and the Canadian dollar have increased their share of forex reserves, the Chinese yuan renminbi has captured much of the attention.

In the October-to-December period, the yuan’s share in global forex reserves surged to $336.1 billion, more than 23 percent year-over-year, from $271.6 billion.

The Bank of Israel stunned financial markets when it executed the largest allocation of reserves in a decade and engaged in a “philosophy” change. The move involved adding $206 billion worth of the Chinese yuan to its reserves, which will reduce the dollar’s share to 61 percent from 66.5 percent and cut the euro’s share to 20 percent from 30 percent.

In recent years, China has been attempting to expand the yuan’s usage and reach in regional transactions, especially as Beijing expands trade with other Asian countries.

In January, according to figures from the Society for Worldwide Interbank Financial Telecommunications (SWIFT), payments utilizing the yuan advanced to a record high of 3.2 percent of market share. By comparison, the dollar and the euro accounted for 40 percent and 36.5 percent, respectively.
Last month, The Wall Street Journal reported that Saudi Arabia and China were working on a deal that would settle oil transactions in yuan instead of dollars.

Beijing has also been pushing for broader usage of the digital yuan, and this could threaten the dollar in international trade, author and financial technology consultant Richard Turrin warns.

With more countries looking to trim their reliance on the dollar, there will be a greater incentive to use the yuan, he says.

“Remember, China is the largest trading country, and you’re going to see digital yuan slowly supplant the dollar when buying things from China. If we go about five to 10 years out, yes, the digital yuan can play a significant role in reducing the dollar’s usage in international trade,” Turrin told CNBC last month.

“What you’re going to see in the future is a rollback, a risk management exercise that seeks to slowly and maybe just slightly reduce the dependence on the dollar, from 100 percent down to 80 percent, 85 percent.”

He said Beijing is ahead of the United States and the rest of the world in all types of financial technology.

The digital yuan is also the “single largest threat to the West in the last 50 years,” warns Kyle Bass, the founder and chief investment officer of Hayman Capital Management.

“Imagine if the Chinese government had access to every Tom, Dick, and Harry in America ... and they have the ability to know where your bank account is, what it looks like, what your income is, and if you’re in financial difficulty,” he told EpochTV earlier this month. “Imagine if they could cross-run an algorithm that says, let’s look for U.S. government employees that have Tinder that are short on cash—and maybe they’re married—and we can corrupt them immediately.”

He has held this opinion for some time, telling CNBC last year that the digital yuan is nothing more than a Trojan horse that could impair Western economies.
A sign for China's new digital currency, the electronic Chinese yuan (e-CNY), is displayed at a shopping mall in Shanghai on March 8, 2021. (STR/AFP via Getty Images)
A sign for China's new digital currency, the electronic Chinese yuan (e-CNY), is displayed at a shopping mall in Shanghai on March 8, 2021. (STR/AFP via Getty Images)

At the same time, there has been “little traction” for the yuan and central bank digital currencies (CBDCs) as they remain in “the experimentation phase,” says Bitcoin Foundation Chairman Brock Pierce.

“We don’t expect to see them being used in cross-border trade in the immediate future,” he told The Epoch Times.

The Chinese yuan has had a sluggish start to 2022, driven by renewed COVID-related public health restrictions and pressure on the world’s second-largest economy.

Year-to-date, the yuan has dropped 1 percent against its U.S. counterpart. Over the past 12 months, the yuan has appreciated more than 1 percent against the dollar.

Broader De-Dollarization Campaigns

It’s no secret that other countries have been reducing their dependence on the dollar, potentially allowing other currencies to enjoy a bolstered footprint in the international marketplace.

Russia initiated its de-dollarization efforts soon after the annexation of Crimea in 2014, and the ruble has fended off Western economic sanctions and financial restrictions, returning to pre-invasion levels. In addition, Moscow has been able to enhance energy production and exports while urging Europe to purchase its crude oil and gasoline in rubles.

“Russia, despite the sanctions from the United States and most Western nations, still has managed to keep financial ties with many large countries around the world, including China and India, among others,” Pierce said. “They have been trying to push their trading partners towards non-dollar trade for a while now, and the sanctions have been a catalyst for them to speed up those efforts.”

India generated headlines in March when it confirmed that it was exploring bilateral rupee–ruble transactions relating to energy and agricultural commodities. The two sides have already established an agreement to settle Russian arms sales and avert sanctions applied under the Countering America’s Adversaries Through Sanctions Act (CAATSA).

But both China and India are paralyzed in a “Russian dilemma,” Zongyuan Zoe Liu, of the Council on Foreign Relations (CFR), said in a report.

“Should they choose to help Russia skirt sanctions, their financial entities will face severe consequences of secondary sanctions in addition to reputational damage if exposed,” Zongyuan wrote. “Should they choose not to provide Russia with relief, the bankruptcy of Putin’s government could cause a major setback to their attempt to build an alternative global financial system.”

Ultimately, economists and analysts are attempting to answer whether the de-dollarization crusade can endure the stress tests the United States and its allies launched since the beginning of Russia’s invasion of Ukraine.

Meanwhile, the BRICS countries (Brazil, Russia, India, China, and South Africa) manufactured the New Development Bank (NDB) nearly a decade ago to de-dollarize development finance. This payment framework also can be connected to digital currencies in the international financial infrastructure.
The Russian central bank has been flirting with a digital ruble, with Olga Skorobogatova, first deputy chair of the Bank of Russia, recently remarking that the currency’s digitization is “very much needed.”

Bullish or Bearish on the Dollar?

While the federal government and the Federal Reserve have spent and printed trillions of dollars, the U.S. dollar has generated impressive momentum over the past year.

The world needs Western economies more than it needs a nation like Russia, said Jack Bouroudjian, the chair at Global Smart Commodity Group.

“The question is moving away from any dependencies created on Russian energy or other basic commodities,” he told The Epoch Times.

But the buck could soon be facing a turning point, says DoubleLine Capital CEO Jeffrey Gundlach.

A U.S. one dollar banknote is seen in front of a stock graph in this illustration taken on May 7, 2021. (Dado Ruvic/Illustration/Reuters)
A U.S. one dollar banknote is seen in front of a stock graph in this illustration taken on May 7, 2021. (Dado Ruvic/Illustration/Reuters)
“My USD view’s been clear & unwavering for a year now: Bullish short run (six months to a year) and bearish long run (two years plus),” he posted in a tweet on April 18. “Inexorably, the long run prevails. Yield curve now steepening & twin deficits still outrageous. USD headwinds building so turning point nearing.”

In the end, diversification could be the primary factor moving forward, according to John Kicklighter, the chief strategist at Daily FX.

“One of the outliers matters for which I have warily watched over the past quarters and years is the effort to diversify away from the world’s most liquid currency,” he wrote in a research note, adding that the yuan has been pushed as the dollar’s long-term challenger.

“This will not be a serious threat for some time; but in the interim, it could seriously disrupt trends born out of ill-formed conviction.”

Suggestions of the dollar’s demise are “greatly exaggerated,” says Neil Shearing, the group chief economist at Capital Economics, arguing that it can be a challenge for other currencies to mirror the attributes and composition of the greenback.

“Fast forward 10 years and the most likely outcome is a more fragmented global financial system—but one that still has the U.S. dollar at its core,” he said in a note.

Bouroudjian agrees, adding that the “rule of law and basic economic strength are the foundations of a global currency.”

“The dollar, with all the problems surrounding it, still is the best and strongest currency globally. It will remain the reserve currency for global trade for decades,” he said.

Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."
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