De-dollarisation – the trend of countries moving trade and forex activity away from the US dollar – is not a new concept. However, the Russia-Ukraine war, as well as the dollar’s growing strength amidst a broader downturn, is reigniting the topic.
There is a reason the US dollar always does well in a crisis: it is the most widely held currency in bank reserves worldwide. This means investors tend to move their money to US holdings in periods of recession, pushing the value of the dollar up while weakening other currencies.
From the map shown above, it’s clear to see that a great deal of de-dollarisation activity is taking place in the Asia-Pacific region, particularly across the Association of Southeast Asian Nations (ASEAN). These countries trade between each other frequently and have large intra-remittance flows, but their separate currencies require a conversion to USD that increases the cost of cross-border payments.
An initiative across Indonesia, Malaysia, the Philippines, Singapore and Thailand is creating an interoperable system that allows residents of each country to use mobile banking apps to pay for goods in their own currency across borders. Singapore, which last year linked its PayNow payment system with Thailand’s PromptPay system, has also formed a partnership with Indonesia to enable instant cross-border payments, made in local currencies, using QR technology.
Aside from making transactions cheaper, ASEAN countries are trying to promote the use of local currencies and reduce reliance on the dollar, which in turn will spur economic growth. Cambodia, which uses both USD and the Cambodian riel, introduced its blockchain-based Bakong payment system in 2020 to encourage more digital payments via the riel. In addition, local currency settlement schemes are being launched between Thailand and Malaysia, Japan and Indonesia, and Korea and China (to name just a few).
Meanwhile, several countries are also exploring the use of central bank digital currencies in a bid to bypass the dollar, with projects at various stages. For several years, China has been developing its CBDC, known as e-CNY or the digital yuan, with the hope that it will enable easier, cheaper cross-border transactions. It’s worth noting that the US Federal Reserve is also working on its own CBDC project. You can track the progress of CBDC projects worldwide in our recent report.
Sanctions avoidance has been another motive for de-dollarisation. Russia has agreed to receive fuel payments at least partially in rubles from number of countries and is also allowing India to use the rupee in trade settlements. Russia has also been working on alternative payment systems with other members of BRICS (Brazil, Russia, India, China and South Africa) designed to reduce the prevalence of the US dollar in transactions, including a new global reserve currency and a single payment system. However, there have been no new project announcements for some time.
Shifting the payments landscape in pursuit of de-dollarisation could have side effects for cross-border payments, particularly if linking local payment systems makes cross-border payments more akin to domestic transactions. In the future, we’ll take a deeper dive into efforts to move away from the dollar for cross-border payments on a regional level.