Commodity experts warn: De-dollarization? Not that easy!

Founder of CPM Group, senior commodity analyst Jeffrey Christian believes that de-dollarization is just a buzzword, attempting to break free from the US dollar globally may backfire.

In an interview, he stated that considering the US dollar's position in the financial markets, despite continuous fluctuations in exchange rates, the dominance of the US dollar may not disappear.

Christian said, "I think de-dollarization is a dream for some of us, it is an idea to shift towards a multilateral international monetary mechanism. It's a good idea, but the logistics are daunting because all governments and countries would have to change how they handle currencies."

Christian is among a group of skeptics on Wall Street who dismiss the trend of de-dollarization, considering it just a buzzword. In a speech earlier this year, Christian told clients that de-dollarization is a "myth, absurdity, and a bad joke," adding that he is not too concerned about the possibility of the US dollar being replaced by another currency.

He mentioned that part of the reason is that countries that are "firmly" not using the US dollar will face a series of economic consequences, highlighting three consequences in particular:

Payment Issues

Firstly, countries pursuing de-dollarization face higher payment risks. He pointed out that last year, India insisted on buying Russian oil with the rupee and dirham (the currency of the UAE). According to initial reports by Reuters, traders said this led to at least seven oil tankers bound for India returning to Russia.

As the US dollar is widely used in the global market and held by central banks worldwide, the liquidity of other currencies is far less than the US dollar, which is the root cause of payment disputes.

According to data from the Bank for International Settlements, as of April 2022, the US dollar accounted for 88% of all daily currency transactions, and data from the International Monetary Fund shows that the US dollar represents 54% of all foreign exchange reserves.

Christian mentioned that other currencies are subject to strict capital controls, which also make their liquidity lower, hence less attractive than the US dollar.

He pointed out that rapidly increasing the liquidity of another currency without triggering high inflation is also challenging.

He added, "Many people hesitate to trade and hold other currency reserves, wealth, and bank accounts because it is not a freely flowing currency, it is restricted."

Trade Restrictions

Secondly, countries attempting to gradually phase out the US dollar may hinder their imports and exports. Christian said this is because the US dollar is the most widely traded currency in the world, not using the US dollar may limit a country's range of trading partners, which can also affect economic growth.

After facing Western sanctions in 2022, Russia refused to use the US dollar. An economist at the University of California, Berkeley, suggested that this may further weaken Russia's economy.

Value Loss

Thirdly, holding other currencies by central banks may be a "bad investment," while the US dollar is a better store of value. The US dollar index has appreciated by about 40% since hitting a bottom in 2011 Christian said when talking about central banks of various countries choosing to reduce their US dollar reserves: "For the past 20 years, the US dollar has been very strong. Therefore, (not choosing to increase or retain US dollar reserves is equivalent to) making a bad investment."

Christian also does not believe that "too many" countries in the world will massively de-dollarize. Due to the widespread use of the US dollar in financial markets, he estimates that if the US dollar is truly replaced, it would also take several decades. This is similar to the views of other foreign exchange experts who say that due to the US dollar's safe-haven reputation, its dominant position will take a long time to be overturned