Many central banks and governments around the world want to wean themselves off the dollar. But on the road to "de-dollarization," except for some countries that have been forced to do so, others have not gone far.
According to International Monetary Fund data released a few days ago, the dollar's share of global official foreign exchange reserves stood at 58.9% in the second quarter of this year, roughly unchanged from the 25-year low first hit in the fourth quarter of 2020.
Although the dollar is the cornerstone of international financial markets, the anti-globalization wave in recent years has led to a hot discussion of "de-dollarization." Russia's invasion of Ukraine has once again shaken this established order, with dollar reserves falling by 2.9% since then, even as the dollar has risen sharply. At constant exchange rates, dollar reserves fell by 6.6%.



Only about 30 per cent of Russia's exports were settled in dollars and euros in July, compared with about 85 per cent at the start of 2022, thanks to a surge in rouble-denominated transactions and the introduction of a renminbi settlement mechanism, according to a central bank report. Russia's sovereign wealth fund and some households are also saving in renminbi.
Renminbi reserves have tripled since 2016, according to the IMF.
Brazil has adopted the yuan as a trade and reserve currency, and Brazilian President Luiz Inacio Lula da Silva recently urged emerging countries to diversify away from the dollar. With dollar reserves running low after a huge debt repayment to the IMF, Argentina has sought to expand the use of the yuan through a swap agreement with the People's Bank of China. Ironically, however, in Argentina's presidential election, the issue of whether to fully dollarize the economy has become a hot topic.



Then there is China itself, which has huge reserves of $3.2 trillion and explicitly seeks to decouple from the West. According to US data, China has cut its holdings of US Treasuries by 21 per cent since January 2022.
Still, the magnitude of the change is surprising, given the system-wide shock inflicted by the US freeze on Russian assets abroad last year. As Elsa Lingos, global head of FX strategy at RBC Capital Markets, put it in a note to clients this week: "If this is de-dollarisation, the pace is impossibly slow."
It is true that the dollar's share has steadily declined over the past 25 years, but this has occurred against the backdrop of the creation of the euro in 1999 and the prolonged strengthening of the dollar after the 2008 financial crisis. Whenever the dollar strengthens, reserve managers at central banks tend to cut dollar allocations to avoid the impact of excessive dollar appreciation. One driver of central banks' aggressive diversification push in recent years has been the pursuit of higher yields in other western currencies such as the Canadian and Australian dollars.
In essence, only countries with few other options, such as Argentina and Russia, have taken strong action to bypass US assets. Although Brazil advocates "de-dollarization," 80% of its foreign exchange reserves are still held in dollars.



There is also little evidence that China is actually moving away from US assets. An important reason for China to reduce its holdings of US Treasuries is the hit to bond prices from rising US interest rates. At the same time, Belgium and Luxembourg have increased allocations to U.S. assets, suggesting that some assets have simply changed hands, according to Brad Setser, a senior fellow at the Council on Foreign Relations.
At the same time, balance of payments data show that Chinese state-owned banks are still repatriating proceeds from trading US Treasuries into higher-yielding residential mortgage-backed securities.
Of course, in the long run, the weaponization of the US monetary system against Russia last year could lead to more countries moving toward "de-dollarization," especially if tensions with China escalate further. The rise of non-dollar cross-border payment systems, particularly for oil trade, shows that countries are aware of the geopolitical need for alternative payment systems.
However, the true measure of the dollar's influence is not its share of foreign exchange reserves and trade settlements, but its status as the currency of choice for international debt issuance and as a safe-haven asset in times of market stress. Overall, there is little sign that the world is weaning itself off dollar addiction.