Emerging Markets

Is the dollar losing its clout among EMs?

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The greenback's dominance in the developing world may be under threat as more emerging economies begin to reduce their reliance on the global trade currency.

"Decreasing reliance on the dollar is an important trend that's going to grow," said Jim Rickards, chief global strategist at West Shore Funds. "As far as emerging markets, the rise of bilateral trading deals is significant for the dollar's future as a trade currency."

Around 80 percent of global trade finance is conducted in dollars, according to January data from SWIFT. But over the past few months, Russia and China have spearheaded a movement to use their domestic currencies for bilateral trade in an effort to distance themselves from dollar-denominated settlements. The countries recently signed a $24 billion three-year currency swaps agreement to double trading.

Meanwhile, Moscow and New Delhi may agree on a currency deal next year, Russian news agency TASS reported two weeks ago. Russia and Egypt are also considering a deal, according to Egyptian media reports last month.

Eye on reserves

It's not just trade; Russia and China are also taking the lead in a $100 billion currency reserve pool and New Development Bank for the BRICS (Brazil, Russia, India, China, South Africa) group.

Moscow announced a $2 billion commitment to the bank over the next seven years in February, while China's $41 billion contribution to the currency pool is the largest. The two projects, announced last year, were widely seen by economists as an alternative to Western dominance in international financial institutions.

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Last week, Kazakhstan joined the group of countries turning their back on the U.S. dollar. The central bank announced a plan to decrease economy dollarization, reducing the use of dollars as it attempts to strengthen its national currency, the tenge.

The move followed calls by International Monetary Fund (IMF) deputy managing director Naoyuki Shinohara last month for emerging Asian economies to actively engage in de-dollarization.

The victims of the surging US dollar
The victims of the surging US dollar

"In some cases, high dollarization can facilitate trade. But there are drawbacks, such as limiting exchange rate flexibility to mitigate against external shocks, and constraining the central bank's ability to be the lender of last resort. Under such circumstances, consideration could be given to actively promote de-dollarization," he said.

Future of the greenback

As the dollar experiences decreased usage in global trade, China's is slowly climbing the ranks.

The yuan is now among the top ten currencies used in global trade, according to rankings by the Bank of International Settlements and SWIFT. Moreover, trading platform EBS told Reuters earlier this year that the yuan ended 2014 among its top five traded currencies.

Still, the greenback's status as a global reserve currency remains intact, experts say.

"The dollar is declining as a trade currency, but it remains strong as a reserve currency. Right now, it's around 61 percent of global reserves, versus 70 percent over a decade ago," said Rickards.

In the meantime, the euro's share has risen to around 25 percent from 18 percent when the currency was first introduced in 1999, according to the IMF.

Furthermore, major commodities are still priced in dollars; as long as that's in place, even if more countries start ditching the dollar for payments, it won't have a big impact on USD dominance, said Uwe Parpart, managing director and head of research at Reorient Financial Markets.