Ans are moving into new currencies. Asian economies are reducing their reliance on the U.S. dollar. This abandonment of the dollar, referred to as de-dollarization, has accelerated notably over the past few months. First, countries such as Singapore, South Korea, Taiwan, Hong Kong, and China already own a large share of foreign assets. They are doing so to actively repatriate foreign earnings back home in their home currency. This paradigm change is transforming the nature of global trade and finance.
The U.S. dollar’s share in global foreign exchange reserves has dramatically fallen to nearly a third of what it was 20 years ago. It went from more than 70 percent in 2000 to just about 57.8 percent in 2024. In practice, however, more than half of global trade remains invoiced in U.S. dollar terms as of April 2024. In the case of ASEAN+3 countries, more than 80% of their trade transactions are dollar-dominated. This information was collected as of last November.
This accelerating movement toward de-dollarization has been further stoked by recent volatility in the dollar’s value. Since the start of 2024, the dollar index has lost over 8% of its value. Fears over U.S. policymaking plunged equity markets into one of the largest selloffs earlier this year, starting especially in April. Fears of a stronger dollar have led Asian investors to move to hedge their dollar exposures. Hedge ratios have recently peaked at roughly 44% for Japanese life insurers and up near 70% for Taiwan.
Experts believe this trend is largely due to worries that the dollar will be used as a weapon for trade sanctions. Mitul Kotecha, head of FX and EM macro strategy for Barclays in Asia, stated, “Countries are looking at the fact that the dollar has been, and can be used as a sort of weapon on trade, direct sanctions, etc… That’s been the real change.”
China has moved aggressively to encourage bilateral trade settlements in its own currency, the yuan. The second central aspect of this push is to reduce countries’ dependence on the dollar. It has thus attracted robust support from a number of Asian countries. The push for de-dollarization accelerates as international relations grow more hostile. Americans view the biggest factor pushing this change as U.S. foreign policy’s increasing unpredictability and erraticism.
Abhay Gupta noted that “De-dollarization in ASEAN is likely to pick up pace, primarily via conversion of FX deposits accumulated since 2022.” Asian economies are becoming more willing to diversify their dollar-denominated reserves. This strategic shift is designed to make them less vulnerable to external shocks tied to the U.S. dollar.
Peter Kinsella, the global head of Forex strategy at Union Bancaire Privée, sheds light on the key difference. He clears up U.S. dollar weakness vs. de-dollarization process. “We’ve seen the U.S. dollar weaken before over various cycles and regimes, but it always maintained its reserve and hegemonic status,” he remarked. Kinsella expressed confidence that the decline in the dollar’s use as a reserve asset would continue, stating that “the wider decline in the USD’s use as a reserve asset appears set to continue.”
In the face of all these shifts, the reality is that nothing else even comes close today to the dollar’s unrivaled liquidity. The dollar reigns supreme in terms of depth within bond and credit markets. Francesco Pesole remarked, “No other currency holds the same liquidity, depth of bond and credit market as the dollar, so it’s more a matter of a reduction in its reserve appeal, rather than losing its throne.”
With Asian countries rapidly moving towards diversified currency strategies, observers are identifying potential winners among regional currencies. Craig Chan remarked that “some of the high performers that we’re looking at will be places like Japanese yen, Korean won and Taiwan dollar.” In some ways, this represents a significant retreat by investors from the established domination of the U.S. dollar.