Is de-dollarisation faltering? US dollar use in global payments is soaring

Bets against the US dollar are failing as the DXY index surges and the role of the greenback in the global economy remains intact. The US dollar index surged to $107.32 last week, the highest point since November last year. It has risen by almost 7% from the lowest level this year.

Concerns about the US dollar remains

A key theme in the financial market recently has been on de-dollarisation. It took center stage in the recent BRICS summit in South Africa, where leaders complained about the role of the US dollar in the world economy.

Most countries are right to complain about the dollar hegemony. For one, the recent surge has left many countries and companies with dollar-denominated debt at risk of default. For example, on Monday, Evergrande creditors warned of an uncontrollable collapse of the company. 

The US has also increasingly used its sanctions power to go against its opponents like Iran and Russia. As a result, officials in countries like Saudi Arabia, Russia, South Africa, and Brazil are worried about sanctions.

Meanwhile, there are concerns about America’s fiscal situation as its debt surges. The country’s total debt has jumped to over $33.5 bilion. It has risen by over $500 billion in less than a month even as China and Saudi Arabia slash their US dollar debt holdings.

De-dollarisation faltering?

While concerns of the US dollar are rising, there is evidence that the currency’s use is rising. Data compiled by Swift shows that the currency had a 48% market share in global payments. This was the highest level in years. 

As shown below, the euro has lost its share substantially. After peaking at 40% in 2021, the currency’s market share has collapsed to 23.22%. The British pound has plummeted to 7.15% while the Japanese yen and the Chinese yuan have fallen to 3.68% and 3.47%, respectively.

Meanwhile, gold, which is often seen as an alternative to the US dollar has dropped by 11.26% from its YTD high even as central banks continued accumulating it.

The dollar is hard to displace because of its role in global trade and currency reserves. The challenge for countries moving away from the USD is that there is no viable alternative. In a recent article, I pitched the Swiss franc as a viable alternative because of the country’s strong fiscal situation and neutrality on key issues. 

Further, many investors and traders are moving to the safety of the US dollar as interest rates rise. The Fed has hiked rates from near zero to between 5.25% and 5.50%, making short-term bonds and money market funds more attractive.