The Dollar System in Stunning Decline

The rapid emergence of new economic centers of power worldwide has not gone unnoticed by the President of the European Central Bank, Christine Lagarde. In remarks in New York to the Council of Foreign Relations on April 17, she acknowledged that the weaponization of the dollar and Washington’s use of sanctions have played no small part in moving countries away from a system based on the U.S. currency. The growing instability, in her view, “could create an opportunity for certain countries seeking to reduce their dependency on Western payment systems and currency frameworks — be that for reasons of political preference, financial dependencies, or because of the use of financial sanctions in the past decade.”

In fact, the evolution of the dollar as a reserve currency was examined by Stephen Jen, the CEO of London-based asset management company Eurizon. He warned on April 18 that the dollar’s share in global reserves fell last year at ten times the average speed of the past two decades, as cited by Bloomberg. The process began as some countries started to look for alternatives after seeing Russia’s assets frozen abroad and the country cut off from the global financial messaging system known as SWIFT. The dollar has lost roughly 11% of its global market share since 2016 and double that amount since 2008, Jen and his Eurizon colleague Joana Freire wrote in a note.

In 2022, there was “a stunning collapse” in the market share of the dollar as a reserve currency, “presumably due to its muscular use of sanctions,” the note reads. “Exceptional actions taken by the U.S. and its allies against Russia have startled large reserve-holding countries,” most of which are emerging economies. The greenback now represents about 58% of total global reserves, they wrote, down from 73% in 2001 when it was the “indisputable hegemonic reserve”.

As we have reported, China and India are working to use their own currencies to settle international trade, while Russia started to accept payments for its exports from a number of countries in rubles and Chinese yuan. The BRICS countries, for their part, are exploring methods of settlement outside of the U.S. dollar.