The latest "de-dollarization" hype is just that, a hype, because there are many reasons why the US dollar reigns supreme.
ndonesia and several other countries are continuing their efforts to raise the "de-dollarization" hype. There has been much talk recently on using their own currencies.
The use of local currencies to settle trade transactions and investments, dubbed local currency settlement (LCS), has been on the rise. Yet, de-dollarization simply means reducing reliance on the United States dollar to settle cross-border trade or to diversify reserves, but the greenback’s dominance is here to stay.
It’s really nothing new and none of these ongoing efforts threaten the US dollar’s supremacy. Notwithstanding significant shifts in the international monetary system, this status quo has held for more than 60 years.
Since 1989, the dollar’s share in global reserves has remained above 50 percent. It has also been remarkably stable at close to 45 percent in global foreign exchange turnover (Iancu et al., 2020). Most payments and trade transactions, as well as the global reserve currency, are still denominated in dollars.
Moreover, Maronoti (2022) emphasized: “The USD was involved in nearly 90 percent of global FX [foreign exchange] transactions, making it the single most traded currency in the FX market. [...] At least 85 percent of trading in the spot, forward and swap markets features the USD in one leg of the transactions.”
Other currencies lag well behind, even those that follow it, like the euro and the mighty renminbi. According to Maronoti in the same article, “The euro, the second most traded currency, has a share of only 31 percent.”
As the world’s most widely used reserve currency, the dollar meets all the necessary key elements in determining reserve currency status, including: 1) the size (i.e. share of world output and trade) and credibility of the US economy; 2) macroeconomic and political stability, especially price stability; 3) transactional demand of reserve holders; and 4) inertia (very slow to change).
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