The Shanghai Cooperation Organisation – China, India and Russia, as well as Kazakhstan, Kyrgyzstan, Pakistan, Tajikistan, Uzbekistan, and soon Iran, are members – agreed to increase the use of their own currencies in settling trade amongst themselves, according to the communique issued at the end of its meeting on 16 September. The headline sounds quite dramatic. The substance pales in comparison.
While the total trade involving China, India, and Russia amounted to 17.4% of global trade in 2020 – almost 80% of this is from China alone – trade amongst themselves amounted to merely 1.2% (source, IMF DOTS data for 2020). There are long-term pressures on the status of the US dollar but this statement does not mark a defining turning point.
The US dollar's share of global foreign reserves has dropped almost 13 percentage points since 2000 to 59% currently. However, about 10pp of that decrease took place before 2010. In the past decade the decrease is less than 3pp. Furthermore, the dollar's share of global payments has grown over the past decade, by almost 9pp, to 41%.
Challenges to its supremacy in foreign reserves and global trade are underway as a result of:
An increasingly tripolar world, where globalisation is superceded by regionalisation around the US, EU, and China.
US use of financial measures, such as sanctions and trade barriers, in its foreign policy dealings with, for example, China, Iran, and Russia.
Years of very loose monetary and fiscal policy in the US, which may ultimately undermine the institutional credibility that underpins the dollar's safe have status.
However, there is an awfully long way to go before there are alternatives, whether existing currencies such as the euro or yuan, or new central banked-backed cryptocurrencies, that dethrone the dollar:
Today's starting point is still a dominant one: 59% share of global foreign reserves and 41% share of international payments.
Challenges to international perception of institutional credibility in conventional alternatives from China, post-Covid and property crash, and in the EU, post-Brexit and Russia-Ukraine War.
Direct government interference in pricing of the yuan.
The barriers to institutional adoption of non-central-bank-backed cryptocurrencies, eg convertibility, disclosure of source of funds, and concentrated trading.
Related reading
The US dollar dagger for emerging markets, Sep 2022
US, Europe, China: A Tripolar World hastened by the Russia-Ukraine War, Mar 2022
US dollar still the dominant reserve currency – Russia sanctions confirm this, Mar 2022