JPMorgan strategists warn of emerging signs of de-dollarization

There are emerging signs of de-dollarization in the global economy even though the U.S. currency will likely maintain its dominance in the market for the foreseeable future, said JPMorgan strategists on Monday.

Data shows that the dollar’s share of the global forex trading volumes remains close to the record highs of 88 percent. Trade invoicing using the greenback and euro also stays around 40 to 50 percent in recent decades. Analysts, however, point out other areas where the dollar dominance has declined.

The dollar’s share in the forex reserves held by global central banks has hit a record low of 58 percent. Although the dollar’s portion in the forex reserves remains the largest among global currencies, the share drops further when accounting for gold which now represents 15 percent of global reserves.

Analysts at asset management firm Eurizon previously said the “erosion of the dollar's reserve currency status” had sped up over the past years, particularly since the start of the Ukraine War. Eurizon, nevertheless, affirmed that the U.S. dollar would still be the main currency for cross-border transactions.

American credit rating agency Fitch Solutions predicted that the dollar's dominance would decline over time but said that there would not be a “paradigm shift” regarding its status as a reserve currency. Experts at the agency said there was no alternative to the dollar for international trade at the moment.

Countries reduce reliance on dollar

Efforts by other countries to reduce reliance on the U.S. dollar also pose risks to the currency’s dominance in the global economy. BRICS nations — Brazil, Russia, India, China and South Africa — have formed new trade agreements to counter the West’s economic sanctions against Russia.

The U.S. and its allies have imposed sanctions on Russia and other adversaries since Russia began its invasion of Ukraine last year. Western countries freeze Russian assets and limit the country’s access to global currencies, creating volatility in Russia’s domestic market.

Earlier this year, Brazil and China agreed to conduct trading using domestic currencies. This effort has significantly increased the yuan’s share in Brazil’s currency reserve. China and Russia also conduct a significant portion of their trading activities with the yuan, with the Chinese currency taking over the U.S. dollar’s spot as Russia’s most traded fiat.

Sources said Saudi Arabia and China are also in talks to settle oil sales using the yuan. According to data, China’s share in the global currency reserves has risen to around seven percent over the past few years.

Despite the recent growth of the yuan in the global market, analysts say that it is unlikely for the yuan to replace the dollar’s position as a dominant currency. JPMorgan explained that China’s capital control would limit the internationalization of the yuan.

Unlike other global currencies, the Chinese government does not allow the free trade of the yuan. The People’s Bank of China fixes the yuan rate every day, only allowing the value to fluctuate with a margin of two percent of the said rate. This method stabilizes the yuan’s value, which according to experts is beneficial for the country’s exports.

In addition to BRICS countries, members of the Association of Southeast Asian Nations (ASEAN) have also agreed to use their domestic currencies for regional trade. ASEAN member countries reasoned that reducing reliance on Western currencies was necessary to maintain their economic stability.

Despite the efforts to reduce the dollar use, Goldman Sachs strategists said dollar contenders, including the yuan, had difficulty building the market’s trust for access and “accompanying legal framework.” Treasury Secretary Janet Yellen also previously said the U.S. financial market was very robust, providing the capital depth needed to maintain the dollar’s stability.