USD: Gradual reserve erosion and sanctions-driven shifts – Commerzbank

Commerzbank’s Head of FX and Commodity Research Thu Lan Nguyen argues that, despite Iran’s Renminbi toll plans and geopolitical tensions, the US Dollar (USD) remains structurally dominant in trade and reserves. She notes a gradual decline in the Dollar’s reserve share and increased use of non-traditional currencies, but stresses this is largely sanctions-driven and that, absent such measures, the USD-centric system’s network advantages would prevail.

Dollar dominance faces slow, sanctions-led erosion

“Indeed, the dollar’s status as the world’s primary reserve currency is largely based on its dominance as a vehicle currency in global trade. This means the US dollar is not only predominantly used in direct trade with the United States but also in trade between third-party countries. This can be observed in the fact that the share of the USD in international payment systems is significantly higher than the share of the US in global trade.”

“Nevertheless, it is undeniable that the dominance of the US dollar has shown cracks in recent years, and Iran’s plans could support this trend. But this can at best be described as a gradual erosion rather than a widespread departure from the dollar. The share of dollars in global foreign exchange reserves has dropped from around 70% in 2000 to just under 60% recently.”

“However, despite geopolitical tensions, there is little evidence to suggest a fundamental shift away from the USD. The recent changes in trade and reserve currencies seem primarily politically driven rather than economically motivated. Without these interventions, the advantages of the USD-centered system and its network effects remain clearly superior.”

“What is clear is this: without sanctions, there would be no economic incentive to deviate from the USD-centric system. The advantages, particularly due to network effects, are far too significant. Simply put: it is efficient to trade in US dollars because the (still large) majority does.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)