Asia is slowly shifting away from the US dollar, driven by a mix of geopolitical issues, changes in finance, and sudden disruptions in currency stability. Regional developments are also playing a part.
Recently, the Association of Southeast Asian Nations (ASEAN) unveiled its Economic Community Strategic Plan, which aims to boost local currency usage in trade and investment from 2026 to 2030. This plan acknowledges the need to mitigate the shocks caused by currency fluctuations by promoting local transactions and enhancing regional payment connections.
“The unpredictable trade policies and significant drop in the dollar’s value are likely speeding up the transition to other currencies,” remarked Francesco Pesor, an FX strategist at ING.
While this change is especially noticeable in Asia, globally, there’s also a decrease in reliance on the dollar. Its share in global Forex reserves has fallen from over 70% in 2000 to 57.8% in 2024. This year, the dollar experienced a notable decline, particularly in April, amidst uncertainty regarding US policy. The dollar index has dropped more than 8% since the year began.
Although currency shifts aren’t new, the context has evolved. Investors are beginning to see dollars as both a tool and a potential liability in trade negotiations. This realization has led to a revaluation of dollar-heavy investment portfolios, according to Mitul Kotecha, head of Barclays’ Forex and EM macro strategy.
“Countries are waking up to the idea that the dollar can serve as a weapon in trade or for imposing sanctions. This mindset has changed significantly over the past few months,” he told CNBC.
Lin Li, who leads Asian Global Market Research at MUFG, noted that there’s a growing movement away from dollar dependency, especially among Asian economies looking to use their currencies more in exchange scenarios.
Accelerating the Shift
According to a note from Bank of America, the movement away from the dollar is gaining traction in ASEAN, primarily driven by large investors who are becoming more proactive in hedging foreign investments.
“The trend away from the dollar in ASEAN is expected to accelerate, mainly through the conversion of FX deposits accumulated since 2022,” stated Abhay Gupta, the bank’s forex strategist.
Beyond ASEAN, BRICS nations, including India and China, are actively developing their own payment systems to bypass traditional ones like Swift and lessen their dollar reliance. China is also advocating for bilateral trading settlements that do not involve the dollar.
Countries are becoming aware that the dollar can be used as a sort of weapon for trade and sanctions. That’s a real shift.
Kotecha from Barclays described the shift as a “slow but steady process.” “[But] this is evident in central bank reserves as they gradually decrease their dollar holdings.” He noted that Asian economies like Singapore, South Korea, Taiwan, Hong Kong, and China hold a significant portion of foreign assets, giving them the potential to convert foreign income into their local currencies.
This sentiment was mirrored by Andy Ji, an Asian Forex and Rate analyst in the ITC market, highlighting ASEAN+3 countries, which encompass China, Japan, and South Korea, as particularly dependent on the dollar. As of November last year, over 80% of trade invoices in ASEAN+3 were still denominated in US dollars.
Moreover, Nomura pointed out that as Asian investors increasingly hedge against dollar exposure, the shift continues. Forex hedging involves taking steps to protect against fluctuations in currency values, often by locking in exchange rates to prevent losses when the dollar experiences unexpected changes.
Investors hedging against the dollar tend to sell it and buy local or alternative currencies instead.
“We expect to see strong performance from currencies like the Japanese yen, Korean won, and Taiwanese dollar,” said Craig Chang, global head of Forex Strategy at Nomura, who noted a significant uptick in Forex hedges from institutional investors like life insurance companies, pension funds, and hedge funds.
Nomura found that the hedging ratio for Japanese life insurance companies stands at approximately 44%. By April and May, this figure had increased to around 48%, while Taiwan’s hedging ratio is estimated at about 70%.
Is the Dollar Still Dominant?
This begs the question: is the move away from the dollar a temporary trend or a more permanent shift?
For now, it may be more cyclical, according to Cedric Chehab, chief economist at BMI. Another possibility is that governments may push pension funds to invest a larger portion in domestic assets.
Some experts note that while countries may be reducing their dollar reliance, it’s tough to completely dethrone the greenback as the leading reserve currency.
“Other currencies struggle to match the dollar in terms of liquidity and robust credit markets,” said Pesor.
Peter Kinsella, global head of forex strategy at Union Vanserle Private, added that it’s essential to differentiate between a weakened dollar and the process of de-dollarization.
“The US dollar has seen weakness at different times but has consistently maintained its reserve status,” Kinsella explained. As of April, more than half of global trade is still conducted in dollar terms.
“That said, the ongoing decline in the dollar’s status as a reserve asset seems poised to continue, and we expect gold to benefit significantly from this trend,” the strategist concluded.
