The trend of de-dollarization has accelerated as global reserves held in US dollars by central banks have fallen below 50%, indicating a significant erosion of trust in the dollar as a reserve currency.
Global Reserves Drops
According to a note by Eurizon SLJ Asset Management, the percentage of reserves held in US dollars dropped to 47% in 2022 from 55% in 2021, which analysts describe as an exceptional decline in just one year.
Sanctions enacted by the US against the Bank of Russia have been cited as the cause of the decline. The US government’s wide package of sanctions against Russia for its involvement in the Russia-Ukraine conflict, including freezing its gold and foreign currency assets abroad, and putting key companies on the designated entity list of the Office of Foreign Assets Control (OFAC), have made other countries less willing to hold their reserves in US dollars.
The report notes that these “exceptional actions” have made the US dollar toxic and caused other countries to seek alternatives to safely conduct trade amongst themselves.
The BRICS and ASEAN Blocks
As a result, global blocs like BRICS and ASEAN are looking for alternatives, with BRICS studying an initiative for creating a common currency that will be discussed at the next BRICS summit in South Africa.
The usage of national currencies for international settlements is also being encouraged by ASEAN countries, who fear the application of secondary sanctions.
The De-dollarization and Why it is happening
This de-dollarization trend fueled by the so-called “weaponization” of sanctions by the US government has caused more and more countries to increase their gold holdings while dropping their foreign currency reserves.
Russian Deputy Minister of Foreign Affairs Alexander Pankin criticized the “weaponization” of sanctions, noting that more and more countries were reducing their reliance on the US dollar.
He said that these trends show that the US dollar is becoming strong but still toxic for everyday operations, and although not yet a mainstream trend, it might become one.
The trend of de-dollarization is accelerating as the US dollar’s status as a reserve currency erodes due to the weaponization of sanctions. Countries are increasingly diversifying their reserves away from the dollar, seeking alternatives to safely conduct trade, and even considering creating common currencies like BRICS.
The future of the US dollar as a reserve currency remains uncertain in light of these developments.