US Dollar Supremacy Faces Accelerated Decline as Nations Seek Alternatives

The US dollar’s global dominance is reportedly diminishing rapidly, as countries reconsider their reliance on it after witnessing the United States impose sanctions on Russia using the USD.

A recent Bloomberg report by Stephen Jen and Joana Freire from asset management firm Eurizon SLJ Capital highlights that in 2022, the US dollar’s share in global reserves fell at a rate 10 times faster than its average decline over the past two decades.

Taking into account exchange rate fluctuations, the dollar has lost approximately 11% of its market share since 2016, and double that since 2008.

Jen and Freire state in an investor note that countries in Asia, Latin America, Africa, the Caribbean, and the Pacific Islands, collectively referred to as the Global South, are reducing their dollar reserves in search of an alternative to prevent experiencing Russia’s situation.

“In 2022, the dollar experienced a remarkable drop in its market share as a reserve currency, presumably due to its aggressive use of sanctions. The extraordinary actions taken by the US and its allies against Russia have alarmed large reserve-holding countries.”

According to Jen and Freire, the dollar now represents 58% of global reserves, a significant decrease from the 73% it held over two decades ago when it was regarded as the “unquestionable hegemonic reserve.”

While the dollar’s dominance seems to be waning, Jen and Freire point out that the USD’s position as the world’s reserve currency is unlikely to change in the immediate future since emerging economies still rely on the greenback for international trade settlements.

Nevertheless, the pair caution that developing countries’ dependence on the US dollar is not “inevitable,” and it is possible that an increasing number of nations will join the de-dollarization trend.

“The prevailing view of ‘nothing-to-see-here’ regarding the US dollar as a reserve currency appears too benign and complacent. Investors must understand that while the Global South cannot entirely avoid using the dollar, a significant portion has already become reluctant to do so.”