“It is often claimed that there is no clear alternative to the USD as the world’s global reserve currency, but instead of a single reserve currency the world could move to a broad set of alternative currencies,” Barclays said in a note.
The sanctions imposed by Western countries such as the United States on Russia, following Moscow’s invasion of Kyiv, may eventually hurt the dominance of the US dollar, Barclays said. (File: Bloomberg)
The sanctions imposed by Western countries such as the United States on Russia, following Moscow’s invasion of Kyiv, may eventually hurt the dominance of the US dollar, Barclays said in a note. It could also lead to moving away from a single currency such as the US dollar to a broad set of alternative currencies such as the Chinese yuan, Swedish krona, or Singaporean dollar. Moreover, if this diversification happens at an aggressive pace, the amount of the US dollars in global foreign exchange reserves could fall by $1.7 trillion by 2026, the note added.
Numerous financial sanctions were imposed against Russia such as the freezing of about $630 billion worth of forex reserves owned by the central bank of Russia. Following the sanctions, the rouble fell as much as half its value, and Russia’s bank had to double interest rates to 20 percent to avoid the debasement of the rouble by the Russian central bank. Former RBI governor Raghuram Rajan called these sanctions “economic weapons of mass destruction”. Since the situation has slightly improved and markets are hopeful of negotiations between the two countries to conclude favorably.
The new twenty-dollar bill is seen on the presses at the Bureau of Printing and Engraving in Washington, DC, on August 21, 2003. Photographer: Dennis Brack/ Bloomberg News.
The whole gamut of sanctions against Russia has no doubt escalated the use of global economic warfare. It is fanning fears in other EM (emerging market) countries that their own FX holdings (of DM (developing markets) debt) may prove unusable if a few countries decide to freeze their assets. After all, as Barry Eichengreen points out, one of the main reasons that countries hold FX reserves is as a war chest to be tapped in a geopolitical conflict or another emergency,” Barclays said in a note Tuesday.
“It is often claimed that there is no clear alternative to the USD as the world’s global reserve currency, but instead of a single reserve currency, the world could move to a broad set of alternative currencies. In addition to the Chinese renminbi, in the past decade central banks have increased the share of their FX reserves in non-traditional reserve currencies, such as the Australian dollar, Canadian dollar, Korean won, Singapore dollar, and Swedish krona,” the note added.
According to a paper by the International Monetary Fund (IMF), from 2015 the share of the US dollar in global forex reserves has fallen by over six percent in 2021, a 25-year low as central banks around the world have diversified away from the greenback into other currencies. The IMF’s paper also concluded that “if US dollar dominance comes to an end (a scenario, not a prediction), then the greenback could be felled not by the dollar’s main rivals but by a broad group of alternative currencies.”
IMF’s First Deputy Managing Director Gita Gopinath said in an interview with Foreign Policy that the Ukraine war could mean that some countries may rethink how much they hold certain currencies in their reserves, however, this does not mean that it will lead to the imminent demise of US dollar.