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The US dollar has served as the world’s leading reserve currency since World War II. Today, the dollar represents 58 percent of the value of foreign reserve holdings worldwide. The euro, the second-most-used currency, comprises only 20 percent of foreign reserve holdings.
But in recent years, and especially since Russia’s invasion of Ukraine and the Group of Seven (G7)’s subsequent escalation in the use of financial sanctions, some countries have been signaling their intention to diversify away from dollars.
Over the past twenty-four months, the members of BRICS (a grouping of Brazil, Russia, India, China, and South Africa that recently added Egypt, Ethiopia, Iran, and the United Arab Emirates; Saudi Arabia is considering joining) have been actively promoting the use of national currencies in trade and transactions. During this same time, China has been expanding its alternative payment system to its trading partners and seeking to increase international usage of the renminbi.
This first-of-its-kind project on dollar dominance by the Atlantic Council’s GeoEconomics Center
- Analyzes why the dollar is currently the world’s dominant reserve currency,
- Presents indicators for tracking China’s progress in creating an alternative financial infrastructure, and
- Creates a novel framework and data set for evaluating strengths and weaknesses of the world’s major currencies
Dollar dominance remains strong in reserves, trade, and transactions
Key takeaways
The dollar’s role as the primary global reserve currency is secure in the near and medium term. The dollar continues to dominate foreign reserve holdings, trade invoicing, and currency transactions globally. All potential rivals, including the euro, have a limited ability to challenge the dollar in the immediate future.
BRICS members have turned their attention away from a shared currency and toward new cross-border payment systems with the goal of creating a more multipolar financial system. China has led this effort by accelerating its development of the Cross-Border Interbank Payment System (CIPS)—a renminbi settlement mechanism.
Between June 2023 and May 2024, CIPS added sixty-two direct participants and now comprises 142 direct and 1,394 indirect participants. SWIFT is still by far the dominant player, with more than 11,000 connected banks. Since the direct CIPS participants could clear transactions without relying on SWIFT or the dollar, traditional indicators of renminbi use may be undercounting the actual value.
Negotiations around an intra-BRICS payment system are in the early stages, but the members have reached bilateral and plurilateral agreements with one another, with a focus on cross-border wholesale central bank digital currency (CBDC) and currency swap agreements. These agreements are likely difficult to scale due to regulatory and liquidity issues but may form the basis for a currency exchange platform over time.
In the last quarter of 2023, the share of renminbi in global foreign currency reserves dropped to 2.3% from the peak of 2.8% in 2022, despite Beijing’s active support of renminbi liquidity through swap lines. Reserve managers might be perceiving the renminbi as a geopolitically risky currency because of concerns about China’s economy, Beijing’s position on the Russia-Ukraine war, and increased tensions with the US and G7.
Nearly a third of all central banks plan on increasing their gold reserves in 2024. While the euro was once considered a competitor to the dollar’s international role, it continues to lag far behind and is weakening as an attractive reserve currency. The 2022 sanctions on Russia signaled to reserve managers that the euro exposed them to similar geopolitical risks as the dollar. Those looking to de-risk away from the dollar have turned to gold.
BRICS and dedollarization: What’s happening and why
The project identifies the BRICS as a potential challenge to the dollar’s status due to the individual members’ signal of intent to trade more in national currencies and the BRICS’ growing share of global GDP. Among the BRICS currencies, the renminbi has the highest potential of competing with the dollar as a trade and reserve currency. This section provides a comprehensive analysis of each country’s dedollarization efforts. It also identifies and tracks two key indicators of the strength of the alternative financial infrastructure China is building: China’s swap lines with the BRICS countries and membership in China’s Cross-Border Interbank Payment System (CIPS).
Issue spotlight: Gold resurgence
What does it take to be a reserve currency?
The table below identifies the six essential qualities of a reserve currency. This new analysis evaluates the currencies included in the IMF’s Special Drawing Rights basket as well as the Indian rupee and Russian ruble against the criteria and allows us to demonstrate why the dollar is the global reserve currency. The US Treasury Department originally identified the six criteria in 2009 and now the Atlantic Council GeoEconomics Center built this new framework by identifying specific indicators to compare the selected currencies’ performance in each criterion. You can access the detailed methodology here.
Tracking the dollar’s international use
This tracker was updated on June 25, 2024, to reflect the fact that Saudi Arabia has not yet officially joined BRICS.
Acknowledgements
Research team: Mrugank Bhusari, Maia Nikoladze, Ryan Murphy
Contributions from: Mondrita Rashid, Alisha Chhangani, Ananya Kumar, Niels Graham, Clara Falkenek, Konstantinos Mitsotakis
Project editors: Josh Lipsky, Kimberly Donovan, Charles Lichfield, Walter Frick
Visual design: Salo Aburto, Nancy Messieh
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