The dollar dominance has long been questioned, especially by economic and political competitors of the United States. The recent freezing of Russia’s dollar reserves in retaliation to the Ukraine war has been termed the most severe financial weaponization on record. In this context, Invesco explores the importance of the dollar and the use of alternative currencies.

“Small wonder that freezing Central Bank of Russia (CBR) reserves feels to many like another nail in the coffin of globalisation. Russia-Ukraine as a proxy war, sanctions aimed at financial/economic decoupling, uneven global participation may be axes of a new “Cold War” with competing political/economic/financial systems and a non-aligned movement,” writes Arnab Das, Global Market Strategist at Invesco. “These worries beg the question of whether the dollar reserve system is entering its final innings, along with Pax Americana itself, given the outbreak of war.”

While efforts are underway to diversify away from the dollar and dollar reserves, investment management looks at the key functions of money around the globe.

“The evidence points to partial diversification on some dimensions of money, implying parallel systems rather than displacement of the dollar within the existing system, as happened in the sterling-dollar transition,” as per Das.

The investment management firm takes into consideration — the global unit of account, global means of payment and the store of value. Overall, the US dollar continues to shine but has seen its dominance reduce in recent months.

“The euro and recently, the renminbi have been tipped as contenders for the dollar’s currency crown. However, it’s clear that the euro faces a structural problem, lacking a full-fledged fiscal union to match its monetary union, adds Das.

While global governments wish to insulate their own trade, payments and economy from any potential sanctions or Western goals, Invesco sees parallel systems instead of a replacement for the dollar. “Such a mix may well suit a multi-polar new world order where the US remains financially primus-inter-pares, even if not economically or geopolitically dominant,” believes Invesco.

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