The percentage of reserves held in U.S. dollars by central banks has fallen to less than half of the global total of reserves, according to a note from Eurizon SLJ Asset Management. The note states that the recent sanctions enacted by the U.S. against the Bank of Russia have eroded trust in the dollar as a reserve currency.
Central banks are beginning to diversify their reserves away from the U.S. dollar. A note issued by Eurizon SLJ Asset Management on April 17 revealed that the percentage of the reserves that central banks held in dollars hit 47% during 2022, falling sharply since 2021, when dollars represented 55%. Analysts from the firm explain that this decline in just one year is “exceptional,” and marks an acceleration of the predicted erosion rate of the U.S. dollar.
The cause, the report states, has to do with the wide package of sanctions that the U.S. government applied to Russia due to its involvement in the current Russia-Ukraine conflict, freezing its gold and foreign currency assets abroad, and putting several key companies on the designated entity list of the Office of Foreign Assets Control (OFAC). The note explains these “exceptional actions” have made other countries less willing to hold their reserves in the form of U.S. dollars.
This de-dollarization trend fueled by the so-called “weaponization” of sanctions by the government of the U.S. has global blocs like BRICS and ASEAN looking for alternatives to safely conduct trade amongst themselves. BRICS is currently studying an initiative for creating a common currency, that will be discussed at the next BRICS summit to be held in South Africa. In the same way, ASEAN countries have called for reducing reliance on the dollar, and the usage of national currencies for international settlements, fearing the application of secondary sanctions.
On April 19, Russian Deputy Minister of Foreign Affairs Alexander Pankin criticized this “weaponization,” noting that more and more countries were increasing their gold holdings while dropping their foreign currency reserves. He stated: “These trends show that the US dollar is becoming big, strong, but still toxic for everyday operations. It’s not a mainstream trend, but I believe it might become a trend.”
The decline in the global percentage of reserves held in U.S. dollars is a significant development that has far-reaching implications. The U.S. dollar has been the dominant global reserve currency for decades, with central banks holding large amounts of dollars to ensure stability in their economies. However, the recent trend of de-dollarization is a clear indication that the trust in the dollar as a reserve currency is eroding.
The recent sanctions on Russia have been a major factor in this trend. The U.S. government’s actions have made other countries less willing to hold their reserves in the form of U.S. dollars. This has led to central banks diversifying their reserves away from the dollar, with the percentage of reserves held in dollars falling to 47% in 2022, from 55% in 2021.
This de-dollarization trend is not limited to Russia. Other countries, including BRICS and ASEAN member states, are also looking for alternatives to safely conduct trade amongst themselves. BRICS is currently studying an initiative for creating a common currency, while ASEAN countries have called for reducing reliance on the dollar and the usage of national currencies for international settlements.
The trend of de-dollarization is a significant development that could have far-reaching implications for the global economy. As more countries diversify their reserves away from the dollar, the U.S. could lose its status as the dominant global reserve currency. This could have a significant impact on the U.S. economy, as well as on the global financial system.
In conclusion, the decline in the global percentage of reserves held in U.S. dollars is a significant development that has far-reaching implications. The trend of de-dollarization is driven by the recent sanctions on Russia and the growing desire among countries to reduce their reliance on the dollar. As more countries diversify their reserves away from the dollar, the U.S. could lose its status as the dominant global reserve currency, which could have a significant impact on the global economy.
