Bitcoin‘s emergence has seen crypto advocates persistently describe efforts to move away from the US dollar’s role as the global reserve currency with the term “dollarization”. Last year, numerous local banks in the US declared bankruptcy, and the federal debt reached a record 34 trillion dollars. However, data shows that the US dollar is still the most preferred national currency for international transactions, with global demand for US government bonds continuing to remain stable.
US Dollar Maintains Its Dominance Despite “Dollarization” Expectations
Credit Agricole‘s G10 FX strategy team noted to clients on Monday that “the share of the US dollar in international SWIFT transactions has increased in 2023, reaching its highest level in the last decade. In contrast, the Euro’s share plummeted, while the Japanese yen and British pound’s shares remained moderate.” The G10 FX analysts, led by Valentin Marinov, also added that “the increasing importance of the US dollar as the preferred national currency in international payments and transactions has been another reason for global official and private investors to purchase the currency. As a result, any pressure towards dollarization may further slow down.”
According to the G10 FX strategy team, the US dollar will likely continue to be the preferred currency or safe haven during stressful periods, which will lead to capital outflows from other assets, particularly Bitcoin and stocks.
In the investor note, it was mentioned that according to the data from the International Monetary Fund (IMF), the share of the US dollar held by central banks worldwide in foreign exchange reserves remained at 59 percent in 2023, the same level as the previous three years. The Euro‘s share, however, has fallen to its second-lowest level since 2017. Regarding trends in foreign investments in US government bonds, it was noted that while China, Hong Kong, and Japan’s holdings decreased in 2023, other non-Asian countries compensated for this drop, thus keeping the global total stable.
Credit Agricole continues to believe that “expectations of the US dollar being aggressively unwound and losing its dominance are quite premature. Indeed, despite China and Hong Kong’s (and to a lesser extent Japan’s) US government bond assets being on a downward trend throughout 2023, the demand for US government bonds from the rest of the world was quite good. Additionally, it’s worth highlighting that the US government bond assets of countries like Ireland and Belgium, which are seen as indicators for the assets of foreign investors like China, were quite strong.”
The Chinese Influence in the Dollarization Narrative
On the other hand, according to Credit Agricole, the total US government bonds held by China in October amounted to 769.6 billion dollars. This marks a decrease of 97.5 billion dollars over ten months of the year and indicates the seventh consecutive monthly decline. The continued decrease in China’s holdings of US government bonds supports the dollarization story.
Credit Agricole relates the decrease in the share of countries like China in government bonds to the decline in their relevant foreign exchange reserves. Countries like China have long parked their trade surplus reserves in US government bonds, thereby supporting American consumption.
