#dedollarization
ASEAN members have agreed to increase the use of local currency transactions and push for a better regional payment connectivity, in a move that could be seen as a continuing shift in de-dollarization in the region. -ASEAN briefing
At the 42nd ASEAN Summit, held in Labuan Bajo, Indonesia, ASEAN members signed an agreement to push for better regional payment connectivity and the use of local currency transactions (LCT). The move is seen as the bloc’s strategy to transition away from established currencies used for trade, such as the US dollar.
The US dollar has been king for global trade for decades. This is not only because the US is the world’s largest economy, but also because oil and most commodities are priced in US dollars. However, since the Federal Reserve embarked on its aggressive interest rate hike strategy, central banks of developing countries have been forced to raise their own interest rates to stem the sharp depreciation in their currencies.
To be clear, the US dollar is still the dominant currency among global forex reserves, accounting for some 58 percent of the reserves in the fourth quarter of 2022. The Euro is second and accounts for 20 percent of global forex reserves.
Through the local currency transaction initiative, ASEAN hopes to increase trade within the bloc, deepen regional financial integration, strengthen financial resilience, and bolster regional value chains.
Finance Ministers will next develop an ASEAN Local Currency Transaction Framework to implement its LCT plan.
ASEAN wary of the impact of sanctions
ASEAN members are also wary of the role the US dollar plays in sanctions brought on by the US. The US along with the EU froze some US$300 billion of Russia’s foreign reserves and cut its major banks from accessing the SWIFT network in a bid to cripple the Russian economy. As such, these sanctions have forced ASEAN countries to mitigate their risks and engage in diversifying their reserve currencies. Further, they are also wary that the US could use the power of its currency to target them in the future.
China has been getting rid of its US Treasury Bonds and now holds US$870 billion in US debt – the lowest since 2010. Iraq has now allowed trade with China to be settled with the yuan, and China and Saudi Arabia are considering pricing some oil sales in yuan. The central banks of Indonesia and South Korea have agreed to expand the use of each other’s local currency for bilateral transactions, in addition to India and the UAE also finalizing a deal to trade in their currencies.
