‘De-dollarization’ talk: Should CFOs tune in?

FX markets headlines are dominated by the issue of de-dollarization, an agenda that is insistently promoted by BRICS countries: China, Russia, Brazil, India and South Africa. In this blog, we examine the FX markets impact of the current de-dollarization talk and, in particular, its relevance in terms of currency management.

What is de-dollarization?

De-dollarization can be defined as the sum of actions aimed at reducing the role of the U.S. dollar, both as a reserve asset for central banks and as an invoice and payment currency in international trade. Given the central role of the U.S. dollar in the world economy, it is no wonder that people are paying more attention to this topic.

What lies behind de-dollarization: ‘top-down’ and ‘bottom-up’ views

Heightened geopolitical tensions have pushed the issue of de-dollarization to the forefront. When it comes to currency management, the question is: should CFOs and corporate treasurers pay attention?To answer this question, we need first to understand what lies behind the de-dollarization talk. There appear to be two major trends:

• A macro-political or ‘top-down’ aspiration by BRICS countries to challenge the dominant position of the U.S. dollar.
• A microeconomic or ‘bottom-up’ activity by corporate treasurers seeking to ‘embrace currencies’.

While the first argument grabs most of the headlines, it is the least important of the two in terms of practical implications for currency managers. The second argument is more relevant and is where CFOs and treasurers should turn their attention. The overall impression is that currency managers should not lose sleep over ‘macro-political’ discussions with few immediate implications. However, they should make sure that they have the technology in place to ‘embrace’ a wide range of currencies —beyond USD, EUR and the other ‘majors’— whenever this allows them to secure and enhance profit margins, as well as the firm’s competitive position.

Macro-political talk: much ado about nothing?

Most of the attention is placed around spectacular announcements from BRICS countries aimed at challenging the dominance of the U.S. currency, both in world trade and in the composition of central bank reserves. A good example is the recently announced deal enabling China and Brazil to carry out trade and financial transactions directly in FX markets, exchanging CNY for BRL –or vice versa– rather than first converting their currencies to USD.Made at the height of global geo-political tensions, these statements reflect ‘top down’ concerns from BRICS countries about undermining America’s position in the world. But are they relevant from a business and economics perspective?The numbers are eloquent. Trade data financing from SWIFT, the payments and financing platform, show that while the share of CNY has risen to 4.5% in February 2023 vs less than 2% a year earlier, the dollar’s share still stands at 84.3%, down from 86.8% in 2022. According to the Bank for International Settlements, the dominance of USD is evident “across all FX instruments and counterparties. At least 85% of trading in the spot, forward and swap markets feature USD in one leg of the transactions”.In other words: in the FX world, the dominance of the U.S. dollar is still massive.

Corporate treasurers and currency management: where the action is

In parallel with these ‘top-down’ de-dollarization attempts, a less talked-about ‘bottom-up’ process to expand the use of other currencies is taking place as we speak.Alongside the natural rise of CNY, the currencies of a number of small, but well-managed economies are gaining ground: SEK, NOK, CAD, AUD, NZD, SGD and KRW among others. This movement is, at least in part, driven by corporate treasurers taking advantage of Multi Dealer Platforms, such as 360T, for currency management purposes.These platforms have led to a dramatic compression of spreads, increasing liquidity beyond the major currency pairs and reducing the network effects of USD in FX markets. For example, whereas a CAD-MXN transaction used to require two trades involving USD and CAD on the one hand, and USD and MXN on the other, now CAD-MXN can be directly and competitively traded on Multi-Dealer Platforms.

Advantages of the multi-currency world

The multi-currency world holds many benefits for corporations using FX software solutions with Multi-Dealer Platform connectivity. By removing FX risk with great precision, these companies put themselves in a position to confidently buy and sell in more currencies.Judging from our experience with corporates from many different sectors and parts of the world, the main benefits are:

• Enhancing profit margins. While selling in the currencies of their customers allows businesses to monetise existing FX markups, buying in more currencies makes it possible for them to avoid FX markups on the contracting side.
• Enhancing competitiveness. Solutions to price with an FX rate —including spot and forward rates, with the desired markups per client segment and currency pairs— allow businesses to enhance their competitive position without hurting budgeted margins.
• Optimising interest rate differentials. While treasurers can delay hedge execution to reduce the cost of hedging in the face of ‘unfavourable’ forward points, they can also take steps to maximise favourable forward points to improve margins.
• Reducing credit risk. By selling in their clients’ currencies, businesses can avoid episodes of their customers' FX currency risk turning into their own credit risk in the event of a sharp currency devaluation.

Be prepared with technology, whatever the scenario

What should CFOs and corporate treasurers take away from all those headline-grabbing de-dollarization stories? At the ‘macro-political’ level, the topic should remain under their radar, but only as a piece of the complex political risk jigsaw puzzle.It is at the microeconomic/technological level where their attention should be placed. By making sure that they are in possession of adequate currency management technology, CFOs and treasurers can weather the pressure on profit margins and keep their companies ahead of the competition, whatever the scenario that ultimately unfolds in FX markets.