Sanctions on Russia could hurt dollar dominance, central banks could look to other currencies: Barclays

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Sanctions imposed by Western countries such as the United States on Russia following Moscow’s invasion of kyiv could potentially damage the US dollar’s dominance, Barclays said in a note. It could also lead to a switch from a single currency such as the US dollar to a wide range of alternative currencies such as the Chinese yuan, Swedish krona or Singapore dollar. Moreover, if this diversification occurs at an aggressive pace, the amount of the US dollar in global foreign exchange reserves could fall by $1.7 trillion by 2026, the note adds.

Numerous financial sanctions have been imposed on Russia, such as the freezing of approximately $630 billion in foreign exchange reserves held by Russia’s central bank. Following the sanctions, the ruble lost up to half of its value and the Russian bank had to double its interest rates to 20% to avoid the depreciation of the ruble by the Russian central bank. Former RBI Governor Raghuram Rajan called the sanctions “economic weapons of mass destruction”. Since then, the situation has improved slightly and the markets are hoping that the negotiations between the two countries will conclude favorably.

“The whole gamut of sanctions against Russia has undoubtedly intensified the resort to global economic warfare. This stokes fears in other emerging countries (emerging markets) that their own currency holdings (of DM (developing markets) debt) could prove unusable if a few countries decide to freeze their assets. After all, as Barry Eichengreen points out, one of the main reasons countries hold foreign exchange reserves is that it is a war chest to be tapped into in a geopolitical conflict or other emergency.” Barclays said in a note on Tuesday.

“It is often claimed that there is no clear alternative to the USD as the world’s reserve currency, but instead of a single reserve currency, the world could switch to a wide range of alternative currencies . In addition to the Chinese renminbi, over the past decade central banks have increased the share of their foreign exchange reserves in non-traditional reserve currencies, such as the Australian dollar, Canadian dollar, Korean won, Singapore dollar and the Swedish krona,” the note adds. .

According to a document from the International Monetary Fund (IMF), from 2015, the share of the US dollar in global foreign exchange reserves fell by more than 6% in 2021, a 25-year low as central banks around the world diversified away from the greenback. in other currencies. The IMF paper also concluded that “if US dollar dominance ends (a scenario, not a prediction), then the greenback could be taken down not by the dollar’s major rivals but by a broad group of alternative currencies.” .

IMF First Deputy Managing Director Gita Gopinath said in an interview with Foreign Policy that the war in Ukraine might mean some countries might rethink how much they hold certain currencies in their reserves, but that doesn’t mean it will lead to the impending demise of the US dollar.

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