Asian countries are leaving the dollar for local currencies

Asia is steadily reducing its dependence on the US dollar, driven by geopolitical uncertainties, shifts in monetary policy, and growing efforts to hedge currency risk.

The Association of Southeast Asian Nations (ASEAN) revealed its Economic Community Strategic Plan for 2026–2030, which aims to encourage more trade and investment using local currencies. The plan highlights steps to lessen the impact of exchange-rate swings by promoting settlements in home currencies and by improving payment links across the region.

This trend is most visible in Asia, but it extends globally. The dollar’s share of world foreign-exchange reserves has slipped from over 70 percent in 2000 to 57.8 percent in 2024. More strikingly, the dollar experienced a sharp sell-off in April due to uncertainty around US policy moves. Since January, the trade-weighted dollar index has dropped by more than 8 percent.

Experts note that de-dollarization is not brand new. What has changed is the growing view that the dollar can be wielded as a tool or even a weapon in trade disputes and sanctions. Mitul Kotecha, Barclays’ head of Asian FX and emerging-market strategy, says this recognition has prompted investors and policymakers to rethink their heavy dollar holdings. 

“Countries are looking at the fact that the dollar has been, and can be used as a sort of weapon on trade, direct sanctions, etc. That’s been the real change in the last several months,” he told CNBC.

Asian businesses are shifting away from the dollar

Asian governments and businesses are now eager to shift more transactions into their own currencies to lower their exposure to dollar swings. Lin Li, who leads global-markets research for Asia at MUFG, explains that de-dollarization in Asia is largely driven by a desire to cut risk by using local money as the main medium of exchange.

Bank of America analysts add that two main factors are fueling this push in ASEAN: households and firms are converting US dollar savings back into local bills, and large investors are increasingly hedging their foreign-currency exposures. Both trends chip away at the dollar’s dominance in the region.

Beyond Southeast Asia, the BRICS countries, particularly China and India, have been working on their own cross-border payment platform to sidestep traditional networks like SWIFT and reduce dollar dependence. China has also stepped up efforts to settle bilateral trade directly in yuan.

Barclays’ Kotecha describes de-dollarization as “an ongoing, slow process.” He points to two measures: central-bank reserve data, which show a gradual fall in dollar holdings, and trade-transaction records, which reflect a rising number of local-currency deals. He adds that economies such as Singapore, South Korea, Taiwan, Hong Kong and China hold significant foreign assets, giving them more scope to bring earnings home in their own money.

Meanwhile, Asian investors are guarding against dollar volatility by hedging. When investors hedge their dollar positions, they sell greenbacks and buy local or other currencies, boosting the latter’s value against the dollar.

Nomura’s estimates show that Japanese life insurers hedge about 44 percent of their dollar-currency risk, a figure that rose to roughly 48 percent in April and May. In Taiwan, the hedge ratio is even higher, at around 70 percent.

This raises a question. Is this shift away from the dollar temporary, or is it the start of a long-term change? Cedric Chehab, chief economist at BMI Research, suggests it may still be cyclical unless the United States resorts to harsher sanctions that make central banks wary of holding large dollar balances.

Despite these developments, industry observers caution that the dollar’s role as the world’s main reserve currency is hard to replace. For now, the greenback remains a major part of global finance, and even as it slips, it still outpaces all other currencies by a wide margin.

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