The dollar is losing its reserve status at a faster pace than generally accepted as many analysts have failed to account for last year’s wild exchange rate moves, according to Stephen Jen.

The greenback’s share in global reserves slid last year at 10 times the average speed of the past two decades as a number of countries looked for alternatives after Russia’s invasion of Ukraine triggered sanctions, Jen and his Eurizon SLJ Capital Ltd. colleague Joana Freire wrote in a note. Adjusting for exchange rate movements, the dollar has lost about 11% of its market share since 2016 and double that amount since 2008, they said.

“The dollar suffered a stunning collapse in 2022 in its market share as a reserve currency, presumably due to its muscular use of sanctions,” Jen and Freire wrote. “Exceptional actions taken by the US and its allies against Russia have startled large reserve-holding countries,” most of which are emerging economies from the so-called Global South, they said.

Jen is the former Morgan Stanley currency guru who coined the dollar smile theory.

Last year, Bloomberg’s gauge of the greenback surged as much as 16% as the conflict helped fuel a rise in global inflation that triggered widespread interest rate hikes which sank bond and currency markets alike. It finished the year up 6%.

Smaller nations are experimenting with de-dollarisation while China and India are pushing to internationalise their currencies for trade settlement after the US and Europe cut Russian banks from the global financial messaging system known as SWIFT. There’s also concern the dollar may become a permanent political tool, or be used as a form of economic statecraft to put extra pressure on countries to enforce sanctions that they may disagree with.

The US currency now represents about 58% of total global official reserves, down from 73% in 2001 when it was the “indisputable hegemonic reserve,” the Eurizon pair said.

That said, the dollar’s role as an international currency won’t be challenged anytime soon as developing countries don’t yet have the ability to divest from the greenback for transactions due to its large, liquid, and well-functioning financial markets, Jen and Freire wrote.

Still, the persistence of those conditions “is not preordained” and there may come a time when the rest of the world actively avoids using the dollar, they wrote.

“The prevailing view of ‘nothing-to-see-here’ on the US dollar as a reserve currency seems too innocuous and complacent,” the two wrote. “What needs to be appreciated by investors is that, while the Global South is unable to totally avoid using the dollar, much of it has already become unwilling to do so.”

(Kitco News) Markets need to pay closer attention to the de-dollarization trend since the greenback is losing its power as a reserve currency faster than many analysts are noticing, according to Stephen Jen, CEO and co-CIO of Eurizon SLJ Capital.

The dollar’s loss of its reserve currency status accelerated last year when the greenback was used against Moscow as part of the sanction package after Russia invaded Ukraine. In 2022, the USD’s share as a global reserve currency fell at ten times the average pace of the past 20 years, Jen said in a report.

“The dollar suffered a stunning collapse in 2022 in its market share as a reserve currency, presumably due to its muscular use of sanctions,” Jen wrote. “Exceptional actions taken by the U.S. and its allies against Russia have startled large reserve-holding countries, most of which are from the Global South.”

According to Jen’s calculations, the greenback’s share of official global reserve currencies dropped from 73% in 2001 to about 55% in 2021. And in 2022, it tumbled to 47% of total global reserves.

Coordinated sanctions against Russia alerted many countries, pushing them to seek currency alternatives — for trade settlements and reserve build-up.

“It seems reasonable to speculate that the main driver of the collapse in USD’s reserve status in 2022 may have reflected a panicked reaction to property rights being jeopardised. What we witnessed in 2022 was sort of a ‘defund-the-global-police’ moment, whereby many reserve managers in the world disagreed with the conduct of both Russia and the U.S.,” the note said.

The note added that analysts are failing to notice these changes because the nominal value of the world’s central banks’ dollar holdings is usually used in calculations and changes in the price of the dollar go unaccounted for.

“Adjusting for these price changes, the dollar, we calculate, has lost some 11 percent of its market share since 2016 and double that amount since 2008,” Jen wrote.

Jen is a well-known analyst who coined the “dollar smile” theory while at Morgan Stanley. The theory’s premise is that the USD does well when the U.S. economic growth runs at full speed.

King dollar’s position as the world’s reserve currency hangs on how quickly and successfully other financial markets develop.

“If the financial markets outside the U.S. could thrive (growing in size and becoming ever more energetic, without being unstable), and if the opposite happens in the U.S., the dollar could very well meet its demise. This is, however, not an imminent risk, in our opinion, though the trends are heading in that direction,” Jen described.

Analysts who continue to ignore the de-dollarization trend are being too complacent. “If the U.S. makes more policy errors and abandons the culture of self-examination, there will likely come a time when much of the rest of the world will actively avoid using the dollar,” Jen wrote. “While the Global South is unable to totally avoid using the dollar, much of it has already become unwilling to do so.”

More and more countries, led by China and Russia, are making bilateral trade agreements that exclude the U.S. dollar. The yuan is already the most traded currency in Russia, according to data compiled by Bloomberg. This happened only in February after the yuan surpassed the dollar in monthly trading volume for the first time.

China recently completed the first yuan-settled LNG trade. China also struck a deal with Brazil to trade in their own country’s currencies.

At the same time, China and Malaysia are discussing the creation of an Asian Monetary Fund to reduce reliance on the U.S. dollar, while India and Malaysia announced that they abandoned trading in U.S. dollars and can now settle in Indian Rupees.

Also, central banks have been flocking to gold as a preferred reserve asset, buying record amounts in 2022.

Former Goldman Sachs chief economist Jim O’Neill recently called on the BRICS bloc — made up of Brazil, Russia, India, China, and South Africa — to expand and challenge the dominance of the U.S. dollar.

And U.S. Treasury Secretary Janet Yellen admitted this week that using sanctions could threaten the dollar’s dominance.

Elon Musk has warned against weaponizing currencies as a de-dollarization movement among other countries gathers steam.

In a tweet on Tuesday, the Tesla and SpaceX CEO responded to a video post by economist Peter St Onge, in which he highlighted that “de-dollarization is real and is happening fast.”

“Dollar share went from 73% (2001) to 55% in (2020). Went from 55% to 47% since sanction launched on Russia, now de-dollarizing at 10x faster than the previous two decades,” Onge said.

To that effect, Musk responded: “If you weaponize currency enough times, other countries will stop using it.”

Musk was likely attributing the decline in demand for dollars across the board to the US “weaponizing” the greenback in the form of financial sanctions against the likes of Russia and China, specifically by freezing their dollar reserves or threatening to lock them out of the SWIFT system.

In the face of the dollar’s weaponization, even US allies like Thailand and the Philippines are beginning to show interest in the anti-dollar drive.

Europe also appears to be adopting efforts to undermine the dollar’s supremacy, with French president Emmanuel Macron recently warning against the continent’s dependence on the greenback.

Meanwhile, central banks including China, Russia and India, are leading the revolt against the US dollar by dumping the greenback and buying gold, according Ruchir Sharma, to the chair of Rockefeller International.