USD Gains Momentum as Bitcoin's 'De-Dollarization' Ambitions Face Currency Headwinds

Despite the persistent narrative of "de-dollarization" championed by Bitcoin proponents, recent data suggests that the U.S. dollar (USD) has tightened its grip on international transactions, challenging the narrative of a shift away from the global reserve currency.

USD Dominance in SWIFT Transactions

Credit Agricole's G10 FX strategy team highlighted that the USD's share in international SWIFT transactions reached its highest level in over a decade in 2023. Meanwhile, the euro's share plummeted, and the shares of the Japanese yen (JPY) and British pound (GBP) moderated. This growing significance of the USD in international payments diminishes the momentum toward de-dollarization, according to the strategists led by Valentin Marinov.

In essence, the USD remains a preferred currency for international transactions, potentially acting as a haven asset during times of economic stress. This could draw capital away from alternative assets like Bitcoin and stocks.

Steady USD in Foreign Exchange Reserves

Contrary to expectations of a decline, the note highlighted that the USD's share in foreign exchange reserves held by central banks worldwide remained steady at 59% in 2023, consistent with the previous three years. In contrast, the euro's share reached its second-lowest level since 2017.

The expectation of a substantial unwinding of USD holdings seems premature, with Credit Agricole noting that non-Asian nations compensated for the decline in China, Hong Kong, and Japan's holdings in 2023, maintaining a stable global tally.

Trends in U.S. Treasury Bonds and China's Holdings

Concerning foreign investment in U.S. Treasury bonds (USTs), the note revealed that non-Asian nations offset the decline in China, Hong Kong, and Japan's holdings in 2023. While China's stockpile of U.S. Treasury bonds decreased for the seventh consecutive month, the overall decline may be linked to factors beyond a de-dollarization narrative.

Credit Agricole suggested that the correlation between the decline in Treasury holdings and the fall of foreign exchange reserves in some nations, like China, implies a more complex relationship. These nations traditionally invested trade surplus reserves in U.S. Treasury bonds, contributing to American consumption.

In summary, recent data challenges the notion of an imminent de-dollarization trend, as the USD maintains its dominance in international transactions, foreign exchange reserves, and U.S. Treasury bond holdings. This resilience may impact alternative assets such as Bitcoin, particularly during periods of economic uncertainty.