Is US dollar dominance in danger of being exchanged?

The dollar is losing some of its former safe-haven and universal-medium status as foreign governments diversify reserves and trade away from the US financial system.

• China’s US Treasury holdings fell to $618 billion in July, from a peak of $1.3 trillion in November 2013, while gold, agency bonds and US equities gained favor.
• The dollar rose more than 15% between February and September 2022 after the war in Ukraine began, but has risen less than 5% following the outbreak of war in Iran this year.
• Germany, the Netherlands and France have removed gold from US custody, signaling reduced confidence in the security of reserves held in New York despite the transaction having no immediate financial effect.
• Around 80% of global trade is still conducted in dollars, but China’s yuan-based CIPS processes $115 billion of trade settlements per day versus $5 trillion on the dollar-based Swift system.
• The article attributes this shift partly to the freezing of Russia’s overseas assets in 2022 and to concerns over US sanctions and control of dollar-based finance.

Takeaway: The dollar remains dominant, but the search for alternatives should create a long-term headwind for the currency and a tailwind for international equities and bonds, although the yuan’s current settlement volumes remain much smaller.