An International Monetary Fund (IMF) official has warned that sanctions against Russia may dilute the US dollar’s dominance.
Gita Gopinath, IMF’s First Deputy Managing Director, told the Financial Times Friday that the sanctions have pushed Russia to seek assistance from other currencies. The increased use of other currencies, such as China’s renminbi, could lead to a more fragmented international monetary system.
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“The dollar would remain the major global currency even in that landscape, but fragmentation at a smaller level is certainly quite possible,” Gopinth said. She noted that some countries have opened negotiations over the currency in which they pay for trade.
“Countries tend to accumulate reserves in the currencies with which they trade with the rest of the world, and in which they borrow from the rest of the world, so you might see some slow-moving trends towards other currencies playing a bigger role,” she said.
Gopinath noted that the dollar’s share of international reserves dropped from 70% to 60% over the past two decades.
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Russia’s invasion of Ukraine will also push more entities to consider the adoption of digital currencies, further diluting traditional currency value. China had already explored the possibility of adopting digital currency at its central bank.
“All of these will get even greater attention following the recent episodes, which draws us to the question of international regulation,” said Gopinath. “There is a gap to be filled there.”
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Russia’s invasion also drove up projections of inflation, with analysts revising projections from 10.4% to 12.5%, potentially prolonging what many initially believed would be a temporary inflationary period.