New payment systems could weaken dollar dominance and spike De-dollarization: JP Morgan

The signs of De-dollarization are evident in the commodities space, where energy transactions are increasingly priced in non-USD currencies, highlighted a report by JP Morgan.

“Some signs of de-dollarization are evident in the commodities space, where energy transactions are increasingly priced in non USD currencies” said the report.

This shift reflects a broader trend, as global trade and financial systems evolve to accommodate alternatives to the dollar trade, according to the investment bank.

It said “Globally, new payment systems are facilitating cross-border transactions without the involvement of U.S. banks, which could undermine the dollar’s clout”.

De-dollarization, as defined in the report, involves a significant decrease in the use of the U.S. dollar for international trade and financial transactions.

The report indicated that new payment systems are emerging worldwide, enabling cross-border transactions without relying on U.S. banks. This shift could weaken the dominance of the dollar and, potentially, western financial infrastructure at large.

As per the report the dollar’s share of foreign exchange reserves–often viewed as a key indicator of its dominance–has been declining, particularly in emerging markets.

The report however noted that U.S. dollar is still the world’s primary reserve currency, extensively used for trade and other global transactions. But its supremacy has faced increasing scrutiny amid recent geopolitical developments.

“The narrative that the U.S. dollar’s reserve currency status is being eroded has gained momentum as the world is dividing into trading blocs in the aftermath of Russia’s invasion of Ukraine and heightened U.S.-China strategic competition,” said Joyce Chang, Chair of Global Research at JP Morgan.

Additionally, The BRICS nations are also exploring the possibility of launching their currency for trade among BRICS nations. A development that could signal a move toward reduced dependence on the US dollar.

The BRICS countries have a combined GDP of approximately USD 28 trillion, which is about 27 per cent of the world’s GDP. The total GDP of the BRICS countries using purchasing power parity (PPP) is around USD 65 trillion, which is around 33 per cent of the global GDP PPP.

Russian President Putin said during BRICS 2024 this month at Kazan, that the economic landscape has shifted dramatically since 1992 when the G7 nations accounted for 45.5 per cent of global GDP, while BRICS countries represented only 16.7 per cent.

As per the data of 2023, the BRICS bloc now accounts for 37.4 per cent of global GDP, compared to the G7’s 29.3 per cent. “The gap is widening, and this trend will continue,” Putin added.