## ASIA’S PRAGMATIC CURRENCY PIVOT

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### Summary of the shift and drivers
- Asia’s leading economies are edging away from their eight-decade relationship with the US dollar for international trade.
- Two forces driving the evolution of the international monetary system:
  - Rising geopolitical and geoeconomic fragmentation, prompting policymakers to weigh economic efficiency against national security and strategic resilience.
  - Digital innovation lowering the cost of conducting transactions directly across currencies and financial networks.
- Objective of policymakers: pragmatic diversification to create alternative clearing and settlement pathways that operate alongside existing global systems and build resilience.

### Current role of the dollar (key statistics)
- The dollar still dominates trade in Asia but with evolving dynamics.
- ASEAN+3 composition: 10 ASEAN members (Brunei Darussalam, Cambodia, Indonesia, Lao P.D.R., Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) plus China, Japan, and Korea; together they encompass more than a quarter of the world’s population and generate a quarter of global economic output.
- Dollar’s current shares in the ASEAN+3 bloc:
  - More than 80 percent of trade invoicing.
  - Nearly 85 percent of foreign exchange settlement.
  - More than half of regional banks’ cross-border assets and liabilities are denominated in dollars.
  - Roughly two-thirds of official reserves are denominated in dollars.
- Data callout: "The dollar accounts for more than 80 percent of trade invoicing in Southeast Asia."

### Reasons for dollar dominance and emerging challenges
- Historical roots: postwar global order, US economic weight, and credibility of US institutions.
- Central banks hold dollar reserves as an expression of confidence in the Federal Reserve, the rule of law, and the transparency and predictability of the US monetary framework.
- To retain the dollar’s central role, the US must continue to offer the world’s largest and most dynamic economy, the deepest financial markets, and an independent central bank.
- Recent strains in US institutions and policy unpredictability have raised questions about the dollar’s reliability in some circumstances; investors seek dollar assets when uncertainty originates elsewhere, but doubts about US stability can erode confidence.

### Asia’s regional economic transformation and implications
- Structural shifts over two decades:
  - Two decades ago, nearly a third of value-added exports from the ASEAN+3 group were destined for the US; today that share is down to a fifth.
  - China and ASEAN now each absorb a tenth of the region’s production, up from about 6 percent each two decades ago.
- Production networks (“Factory Asia”) are denser, more interconnected, and more regionally rooted.
- AMRO analytical modeling suggests that shifts in regional domestic demand now affect neighboring economies more strongly than demand shocks originating in the US.
- As business cycles and production networks become more regionally anchored:
  - Monetary policy in Asia is likely to respond more directly to domestic and regional conditions.
  - Early signs show financial conditions in ASEAN+3 economies are increasingly domestically driven.
- Policy implication: expanding use of regional currencies in trade invoicing and settlement will help loosen the link between domestic credit conditions and US monetary policy, reduce structural currency mismatches, and allow central banks to calibrate monetary policy more closely to domestic conditions.

### Payments infrastructure and regional arrangements
- Asia did not pursue a European-style monetary union; instead it pursued pragmatic regional cooperation focused on financial integration and stronger safety nets.
- Post-1997 context note: the IMF stepped in with a $40 billion program to stabilize the region’s collapsing currencies.
- Developments in cross-border payments:
  - Bilateral local currency settlement frameworks between two countries using local currencies via central-bank-authorized financial institutions; these arrangements now operate between many ASEAN+3 economies but remain modest in scale.
  - Retail cross-border payment linkages integrating interoperable, QR code–based fast payment systems allow quick and cheap transfers across borders in domestic currencies (example: linkage between Singapore’s PayNow and Thailand’s PromptPay).
  - Multilateral initiatives expanding these efforts, including Project Nexus.
- China’s role:
  - Renminbi at the forefront due to China’s critical role in regional trade and investment.
  - Chinese investments in cross-border financial infrastructure include expansion of the Cross-Border Interbank Payment System and rollout of the digital yuan.
  - China has increased foreign access to its government bond market, providing a deeper pool of sovereign assets for regional central banks’ reserve diversification.

### Digital finance, tokenization, and wholesale payments
- Next frontier: extend retail payment gains to wholesale financial systems to support large-scale trade and investment.
- Notable digital projects:
  - Project mBridge connects the central banks of China, Hong Kong SAR, Thailand, and the United Arab Emirates through a shared distributed ledger platform for wholesale transactions with central bank digital currencies.
  - Project Guardian (coordinated by the Monetary Authority of Singapore) exploring tokenized assets and open digital infrastructure.
- Tokenization explained and potential benefits:
  - Tokenization converts diverse assets into digital “tokens” that computers can recognize and transfer, creating a common language for assets.
  - Tokenization could eliminate the need for an intermediary currency (the dollar) for transactions between two currencies, enabling direct currency-to-currency interactions.
  - Potential to enhance direct liquidity on shared digital platforms via liquidity pools and reduce dependence on long chains of dealer banks.
  - Tokenized foreign exchange transactions could enable “atomic settlement,” where both sides of a transaction are completed simultaneously, reducing settlement risk and potentially improving liquidity in FX markets.
- Existing arrangements and gaps:
  - Continuous Linked Settlement System (24-year-old) helps reduce settlement risks for major currencies, but many emerging market and developing economy currencies remain excluded.
- Challenges before mainstream adoption:
  - Need to build interoperable digital financial infrastructures and harmonize regulatory standards and cross-border compliance rules.

### Emerging architecture and policy priorities
- The region is forming a sophisticated, multilayered financial architecture that:
  - Keeps the dollar as an indispensable liquidity backstop for global markets and large-scale international transactions.
  - Expands regional platforms for trade and investment using advances in cross-border payment connectivity, tokenization, and greater use of regional currencies including the renminbi and the yen.
- Practical implications:
  - This architecture offers a framework for managing risk in a fragmented world and creating a more balanced and resilient monetary ecosystem.
  - Over time, these developments should align Asia’s financial architecture more closely with its growing economic weight.
- Success factors:
  - Technological innovation plus maintaining institutional trust, policy credibility, and international cooperation underpinning a stable monetary system.

*Dong He is chief economist of AMRO, the Singapore-based international organization set up by the ASEAN+3 governments for macroeconomic surveillance.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2026/09/he.pdf_