Continued de-dollarization
As part of the decrease globalization of the economy is the development of new coalition of trading partners and trading alliances. The strongest new alliance is likely the BRICS, which has been growing steadily over the last few years and continue getting application. One component of the evolution of a trading bloc aligned to the U.S., and one aligned to China, is the question of the dominance of the U.S. dollar. After all, why would a trading bloc aligned to China want to use the U.S. dollar.
As the trade war is heating up between the China and the U.S., China is making big moves to advance the de-dollarization agenda and is dumping billions of US dollars and U.S. treasuries. The Xi Jinping administration is fighting tooth and nail against Trump’s tariffs by imposing equal tariffs on the US. The Communist nation raised tariffs to 125% last week in the latest escalation of the ongoing trade wars. The reciprocal tariffs went from 84% to 125%, and Beijing made it clear that they won’t go any higher.
The latest data indicates that China has dumped $22.7 billion worth of US dollars and treasury bonds and is consistently decreasing its holdings. The Chinese government is slowly yet steadily getting rid of all U.S. debts and remaining free from market fluctuations stemming from the American economy. They ultimate goal is less dependency on the U.S. and the U.S. economy. The dumping of the U.S. dollars and treasury bonds furthers the de-dollarization agenda making the U.S. economy feel the heat.
The de-dollarization statistics from the Treasury Department shows that China’s holdings of U.S. bonds and dollars are rapidly decreasing. The holdings touched a peak of $1,350 billion in 2012-13 and are now at the $750-800 billion mark and trending down. That is a massive reduction of close to 40% to 45% in the last 13 years. The holdings are now at their lowest point since 2009 indicating that the power of the greenback is potentially dwindling.
Not just China, no developing country wants to maintain its economy at the mercy of the U.S. dollars and treasuries, especially as trade conflicts are heating up across the globe and in particular with Europe. The weaponization of the U.S. dollars and treasuries from the White House has led to the de-dollarization agenda gaining steam. Developing countries are now looking to protect and safeguard their respective local economies from the weaponization of the White House. Therefore, emerging economies are now steadily diversifying their central bank reserves with gold and ending reliance on the US dollar.
In a recent podcast episode with Joe Rogan, Elon Musk shared stark warnings about the future of the U.S. dollar. The tech-mogul said that the U.S. is on the verge of going bankrupt. Musk further stated the U.S. dollar would be worth “nothing” if people don’t take action. Musk’s comments come amid a global de-dollarization movement. Many countries have expressed the desire to move away from the greenback and use local currencies for trade.
The U.S. dollar has witnessed a major decline in power in recent years. During the last ten years, the yuan made substantial progress in its market expansion. The usage of yuan for trade invoices increased from zero to thirty percent in the past decade. Foreign banks now collaborate with the Chinese central bank through more than forty currency swap agreements. These recent advancements appear to advance the goal of de-dollarization.
Despite the yuan making a substantial expansion, its value against the US dollar fell to a 2-year low recently. The dip came amid Trump’s announcement of additional tariffs on China. While the de-dollarization movement has found many subscribers, the US dollar will likely continue being the global reserve currency for the foreseeable future.
Trump has changed the course of the markets by levying heavy tariffs on nations, which is now compelling the nations to de-dollarize. By de-dollarizing or exploring de-dollarization, nations like China have already issued commands to reduce US purchases, ushering in reduced dollar dependency narratives. This instance is not new, as the world is now increasingly pivoting to a new financial order where local currencies lead the way, all while trying to jeopardize the dollar’s reserve asset stance.
It could be the beginning of the end of U.S. treasuries and US stocks as leading global reserve assets. Since Nixon took the U.S. off the gold standard in 1971, U.S. treasury debt outstanding has grown by 85 times. The U.S. had to create the credit dollars necessary for the growth in the world economy. This was good for some Americans and bad for others. The nations will be the first to sell U.S. stocks and assets if their economies encounter any imminent danger, such as in the case of a trade war. This will lead to further weakening of the dollar, leading the U.S. economy to lose its luster. This development may also spearhead de-dollarization narratives to an extent.
If the U.S. current account deficit is eliminated, then foreigners do not have dollars to buy bonds and stocks. If foreigners have to juice up their own nations’ economies, they will sell what they own, U.S. bonds and stocks, to fund their nation-first policies. And even if Trump backtracks on the severity of the tariffs, no finance minister or world leader can risk Trump changing his mind again, and therefore things cannot return to the way they were. You must do what is best for your country. This trend has already been noticeable in China and in Europe and they are both seeking more independence from the U.S.
Instead of the U.S. dollar, gold could return and make its brand appearance on the macro global plane. This would lead to the U.S. dollar being secondary in value, with gold recognized as a neutral reserve asset. This would entail nations to rummage for gold, exploring de-dollarization concepts. The dollar will still be the reserve currency, but nations will hold reserves in gold to settle global trade. Trump hinted at this because gold is tariff exempt. Gold must flow freely and cheaply in the new world monetary order. Per Deutsche Bank, gold has been consistently rising up on the radar. The bank has issued a new price forecast for gold, adding how it can reach up to $3,350 by the end of 2025. Even though this is not the main intension and objective, Trump’s global tariff wars are speeding up de-dollarization.