- Dedollarization is merely a myth and could backfire on countries like Russia and China.
- That’s the view of commodity expert Jeffrey Christian, who doesn’t think the dollar’s dominance will go away anytime soon.
- He said countries that phase out the US dollar could also face consequences such as liquidity problems and slower growth.
Dedollarization is likely a passing fad, and countries trying to move the world away from the dollar may soon find that the move backfires.
That’s the view of Jeffrey Christian, a longtime commodities analyst and founder of CPM Group, who believes that moves to de-dollarize countries like Russia, China and India could backfire and hurt their economies.
In an interview with Business Insider, he said that while these trends continue, the dollar’s dominance is unlikely to disappear given how pervasive it is in financial markets.
“I think de-dollarization is a dream that some of us have,” Christian says, “the idea of moving to a multilateral currency system. It’s a great idea, but the logistics of doing it are incredibly difficult because it would require every government and country to change the way they handle currency.”
It’s just a buzzword
Christian is among Wall Street’s dedollarization skeptics, who dismiss the trend as just a buzzword. In a client presentation earlier this year, he called dedollarization a “myth,” “nonsense” and a “bad joke,” adding that he doesn’t take concerns that the dollar will be replaced by other currencies too seriously.
One reason is that countries that “insist” on not using the dollar face a series of economic consequences, he told BI, pointing to three in particular:
1. Payment issues
First, countries that abandon the dollar are at higher risk of payment problems, Christian said. He cited India’s insistence last year on buying Russian oil in rupees and the UAE’s dirhams, which traders said caused at least seven Indian-bound crude tankers to turn back to Russia, as first reported by Reuters.
The dispute over payments stems from the fact that other currencies are less liquid than the dollar, as it is widely used in global markets and held among central banks.
According to the Bank for International Settlements, as of April 2022, the dollar was used in 88% of all daily currency transactions, and according to data from the International Monetary Fund, it made up 54% of total foreign exchange reserves.
Christian noted that other currencies such as China’s yuan are bound by strict capital controls and are also less liquid and therefore less attractive than the dollar.
He also noted that it would be difficult to rapidly increase currency liquidity without triggering high inflation.
“The yuan is not a completely freely movable currency, so many people are hesitant to transact or hold reserves, assets or bank accounts in it, so the yuan has its limitations,” he added.
2. Limited Trade
Secondly, countries that want to phase out the dollar could hinder their own exports and imports. Again, the dollar is the most widely traded currency in the world, and not using it would limit a country’s range of trading partners, which could also impact economic growth, Christian said.
Russia is one example: It denounced the dollar after coming under Western sanctions in 2022. But abandoning the dollar would only further isolate Russia from international markets, which could further weaken the Russian economy, a University of California, Berkeley economist told BI.
3. Loss of value
Third, because the dollar is a good store of value, central banks risk holding other currencies as a “bad investment,” Christian said. The U.S. dollar has risen about 40% since its 2011 low, according to the U.S. Dollar Index, which weights the greenback against a basket of foreign currencies. Meanwhile, currencies such as the yuan have fallen against the dollar over the past decade.
“The dollar has been very strong over the last 20 years, so they’re making a misinvestment,” Christian said of central banks choosing to reduce their dollar reserves.
Christian also said he did not see “many” countries in the world moving widely away from the dollar, with the possible exception of Russia, where geopolitical tensions with the US are affecting economic policy.
He estimates that if the dollar is replaced, it will take decades because of its widespread use in financial markets, a view that echoes other currency experts who say the dollar’s reputation as a safe haven means it will take a long time to lose.
“There are these huge obstacles to moving to a global monetary system that is less dependent on the dollar,” Christian said. “It’s not impossible, but it would either take decades to implement or it would only come about after a very large global economic and financial collapse. I don’t think that’s ever going to happen.”
