Recently, there has been increased discussion surrounding De-Dollarization, or the diminishing dominance of the dollar within the global market system. This topic has captured the interest of people worldwide, prompting various predictions regarding the future trajectory of the US dollar.
Mr. Suphakrit Boonsart, Founder of Thai Bitcast Co., Ltd. offers insights and facts on the matter as follows:
The Evolution of Reserve Currency
Throughout history, the strength of specific currencies has defined the concept of a Reserve Currency. There have been six dominant currencies since 1450: Portugal (1450-1530), Spain (1530-1640), the Netherlands (1640-1720), France (1720-1815), England (1815-1920), and the United States (1921-present). As shown, Reserve Currencies typically last about one lifetime, allowing those born in that period to experience the unique characteristics of that currency. Hence, it is not surprising that many may overlook shifts in global currencies.
In 1940, gold was recognized as the global Reserve Currency and used extensively as a medium of exchange. However, gold faced limitations due to its indivisibility and transportation challenges. In 1971, President Richard Nixon announced the complete end of gold’s role as collateral for banknotes, rendering banknotes that had once been convertible into gold obsolete.
The US Dollar as Reserve Currency and the Petrodollar Factor
In 1974, US Secretary of State Henry Kissinger signed an agreement with Saudi Arabia to conduct oil trade in dollars, establishing the so-called “Petrodollar.” During the Industrial Revolution, this decision propelled the dollar’s global popularity, solidifying its status as a vital Reserve Currency essential for global economic movements.
In June, reports surfaced suggesting the conclusion of the “Petrodollar” contract, leading to questions about its potential financial implications for the dollar. Will the significance of the dollar gradually diminish? However, it remains unclear whether the contract has indeed ended, as no concrete information supports this claim. Currently, while Saudi Arabia can sell oil in other currencies, those currencies do not carry the same weight as the dollar, indicating that the contract’s significance might have already faded due to the network effect that elevated the dollar to its current status as a Reserve Currency.
Additionally, Saudi Arabia has joined the BRICS group, which is noteworthy as BRICS countries have begun accumulating substantial amounts of gold in their reserves, sparking speculation that they might consider using gold as collateral to diminish the US dollar’s significance.
Moreover, Saudi Arabia has become part of the Multiple Central Bank Digital Currency Bridge Project (mBridge), aiming to develop a digital currency for international transfers (Thailand, spearheaded by the Bank of Thailand, has initiated the first experiment). This development signals the onset of substantial changes in the global economy.
Is the Dollar Still Strong? How Long Can It Maintain Its Strength?
As it stands, the US dollar is still the world’s Reserve Currency.
The dollar comprises 59% of the global reserve currency, with the euro at 18.8%. Furthermore, the dollar is used in 88% of global transactions, while the euro accounts for 31%.
It is widely recognized that today’s printed dollar is no longer backed by gold; rather, it relies on Treasury Bonds as a guarantee for its value. This means that dollars circulating worldwide today are printed based on the American economic system as a backing. Consequently, anyone holding US government bonds is essentially a creditor to the US government.
Creditors are categorized into domestic entities amounting to 20.69 trillion and foreign countries at 7.93 trillion. Some nations have shown a tendency to reduce their proportion of creditors and decrease their holdings of US Bonds. Recently, it was reported that China sold a significant volume of US government bonds, though this reduction remains relatively small when compared to its overall holdings. Yet, such actions naturally lead to speculation about the devaluation of the dollar and its implications in a financial war. Conversely, China, as a major creditor to the US, likely has no immediate plans to declare bankruptcy, given its unresolved debts.
Personally, I believe the dollar remains robust, but its decreasing relevance is becoming increasingly apparent. Its influence is growing more evident, especially after America demonstrated its capacity to exert financial pressure on Russia and other nations. Other countries likely perceive the US as wielding excessive financial power.
Nevertheless, a recent fund manager survey indicates an intention to increase allocations to US dollars over the next 1-2 years. Additionally, considering historical changes, the transition from one dominant currency to another typically spans about a century; thus, it is still accurate to assert that “The US dollar remains strong, but that doesn’t mean it will stay strong forever.”
De-Dollarization: The Future of Global Currency
In the recent past, there has been more news about De-Dollarization or the reduction of the dollar’s power in the global market system. It is an issue that people around the world are interested in and have made various predictions about what direction the US dollar will take in the future.
Insights from Experts
Mr. Suphakrit Boonsart, Founder of Thai Bitcast Co., Ltd. provides facts and perspectives on the matter as follows:
Evolution of Reserve Currency
When it comes to the strength of a particular currency at any given time, a Reserve Currency serves as the world’s main currency. Since 1450, there have been six major currencies that dominated:
- Portugal (1450-1530)
- Spain (1530-1640)
- The Netherlands (1640-1720)
- France (1720-1815)
- England (1815-1920)
- The United States (1921-present)
As you can see, Reserve Currency status generally lasts about one lifetime, making any changes in global currency systems hard to detect until it’s too late.
The Era of Gold and the Shift to the Dollar
In 1940, gold was still regarded as the Reserve Currency, but its limitations—such as indivisibility and transportation challenges—prompted a significant change. In 1971, President Richard Nixon announced the complete abolition of the gold standard, leading to paper currencies becoming more prevalent.
The Rise of the US Dollar and the Petrodollar Factor
Following this shift, the US dollar became the dominant Reserve Currency after Secretary of State Henry Kissinger’s agreement with Saudi Arabia in 1974 to trade oil exclusively in dollars, giving rise to the “Petrodollar” system. This move solidified the dollar’s global stature during the Industrial Revolution.
In June 2023, reports surfaced about the potential end of the “Petrodollar” contract, raising concerns over the dollar’s financial stability. While the conclusion remains undecided, it’s noteworthy that Saudi Arabia can trade oil in other currencies, albeit with less popularity than the dollar.
Implications of Saudi Arabia Joining BRICS
Furthermore, Saudi Arabia’s recent move to join the BRICS group has significant implications. These nations have begun accumulating gold reserves, leading to speculation that they may eventually use gold as collateral to diminish the dollar’s importance.
The Future of Dollars: Strong or Weak?
Despite the uncertainties, the US dollar continues to play a crucial role as the global reserve currency. As of now:
| Currency | Global Share (%) |
|---|---|
| US Dollar | 59% |
| Euro | 18.8% |
| Other Currencies | Remaining Share |
The US dollar remains the primary currency for global transactions, comprising 88% of exchanges, further solidified by the US Treasury Bonds that back its value. Yet, there are signs that countries, including China, are reducing their holdings of US bonds, viewing it as a precautionary move amid rising tensions.
Understanding the Devaluation of the Dollar
While perceptions of the dollar’s strength are changing, its devaluation is still a major concern. The US’s ability to wield financial power against countries like Russia has raised questions about whether other nations can afford to remain dependent on the dollar.
Current Trends in Currency Holdings
The latest fund manager surveys indicate an inclination to increase US dollar proportions in portfolios for the next 1-2 years. Historical data suggests that shifts from one reserve currency to another take about a century, implying that while the dollar may not remain unshaken, its decline is not imminent.
Practical Tips for Navigating Currency Changes
- Diversification: Consider holding multiple currencies and assets to hedge against dollar devaluation.
- Stay Informed: Follow global economic news that impacts currency values, especially regarding the US dollar.
- Invest in Precious Metals: Look into gold and silver as alternative investments to protect wealth.
Case Studies: Countries Reducing Dollar Dependency
Countries like China and Russia have been increasingly reducing their reliance on US dollars through bilateral agreements and trade in their currencies. This is a trend to watch closely, as it may signal future shifts in the dynamics of global finance.
