As Trump's erratic tariff policies triggered a wave of US asset sell-offs last month, a fresh wave of "de-dollarization" is gaining momentum across Asia...
Multiple signs indicate that demand for currency derivatives that bypass the US dollar is rising among banks and brokers in the region, as trade tensions add further urgency to the "de-dollarization" shift that has been underway for years.
Companies are receiving an increasing number of trading requests, including numerous hedging transactions that avoid the US dollar, involving currencies such as the Chinese yuan, Hong Kong dollar, UAE dirham, and euro. Meanwhile, a notable phenomenon is emerging: demand for yuan-denominated loans is beginning to grow robustly.
This quest for alternatives once again demonstrates that companies and investors are moving away from the US dollar, the global reserve currency.
Earlier this week, Caixin reported that Stephen Jen, a renowned strategist known for the "Dollar Smile Theory," had warned that a potential "avalanche" of $2.5 trillion in sell-offs from Asia could erode the long-term appeal of the US dollar.
Acceleration of De-dollarization
In the past, even when transferring funds between two local currencies, the vast majority of foreign exchange transactions would use the US dollar. For example, an Egyptian company in need of Philippine pesos would typically first convert its local currency into US dollars and then use the received US dollars to purchase pesos.
However, according to recent conversations industry insiders have had with employees of companies and financial institutions across Asia, attempts to bypass the US dollar have been heating up , with companies increasingly inclined to adopt strategies that skip the US dollar intermediary.
"The increase in transactions between non-US dollar currencies is largely due to technological advancements and improved liquidity. Both parties to the transactions believe that the prices may not be worse than those using the US dollar, so trading volumes naturally increase," said Gene Ma, head of China research at the Institute of International Finance (IIF).
A source from a commodity trading company in Singapore said that financial institutions in Europe and other regions are increasingly marketing yuan derivatives linked to the US dollar. Multiple sources said that the growing trade ties between mainland China, Indonesia, and the Gulf region are also stimulating demand for non-US dollar hedging.
According to an executive at a foreign bank in Indonesia, the bank will establish a dedicated team in Jakarta this year to meet the growing demand from local clients for transactions between the Indonesian rupiah and the Chinese yuan.
Clearly, this gradual shift away from the US dollar is eroding the global financial system that has historically relied on the US dollar as the primary settlement currency.Over the past few decades, the US dollar has been ubiquitous, from debt financing in emerging markets to trade settlement. It is estimated that the use of the US dollar as an intermediary currency accounts for approximately 13% of its daily trading volume.
However, the global status of the US dollar had already been under threat long before Trump's unpredictable trade policies forced the market to thoroughly reconsider the dollar's position.
China has been committed to promoting the internationalization of the renminbi (RMB) for many years, signing currency settlement agreements with countries such as Brazil and Indonesia to facilitate the global use of the RMB. The BRICS group, composed of emerging market countries, has also discussed the issue of de-dollarization. The outbreak of the Russia-Ukraine conflict in 2022 further sparked interest in "de-dollarization" among some countries, as unprecedented Western sanctions against Russia quickly raised questions about whether the US dollar had been weaponized.
RMB Gains Popularity
According to SWIFT data, the RMB accounted for approximately 4.1% of global payment shares in March, still significantly lower than the US dollar's 49% share. However, some of China's payments are processed through its self-built system, which is growing rapidly.
As a wholesale payment system dedicated to cross-border RMB payment and clearing, the Cross-border Interbank Payment System (CIPS) has seen steady growth in business volume and a significant expansion in coverage since its launch in October 2015. As of the end of December 2024, its business had covered 185 countries and regions worldwide. In 2024, the amount of cross-border RMB payments processed reached 175 trillion yuan, up 43% YoY.
In March, the proportion of RMB used by Chinese investors and trading companies in cross-border transactions reached a record high. According to data released by the State Administration of Foreign Exchange, the proportion of RMB used by Chinese individuals and entities in cross-border transactions in March was 54.3%, with a total amount reaching 724.9 billion US dollars. Chinese exporters are also accelerating the conversion of US dollars into RMB, reversing the previous trend where some exporters preferred to hold US dollars due to concerns about the weakening of the RMB exchange rate.
According to industry-compiled data, China's exports to Southeast Asia grew by more than 80% in the five years ending March 2025, while exports to the UAE and Saudi Arabia more than doubled. This far exceeded the growth rate of China's exports to the US and the EU.
Although the hedging costs for the RMB are generally higher than those for the US dollar, the low interest rates on related RMB loans mean that the total cost remains attractive to borrowers.
Alicia Garcia Herrero, Chief Asia-Pacific Economist at Natixis, said, "The cost of RMB financing is only one-third of that of US dollar financing."However, she also mentioned that the yuan currently has certain limitations due to weak overseas liquidity.
In any case, the tariff-related fluctuations in the US dollar clearly indicate that it is not only China and other major economies that are eroding the global status of the US dollar. Trump's trade policies, disregard for traditional practices, and persistent criticism of the US Fed have all reinforced market perceptions that the US dollar's dominance in the global economy is facing its greatest threat in decades.
"Given the US dollar's extraordinary staying power, its position would seem to require a truly epoch-making shift in the international environment to be displaced. However, the risks of such a seismic change are mounting," wrote analysts including Oliver Harvey of Deutsche Bank in a recent report.
