South Africa’s US dollar dilemma 

The widespread use of the US dollar in the South African financial system, including as a reserve asset, poses a potential vulnerability in the form of concentration risk. 

This comes at a time when other central banks around the world are reducing their use of the dollar as a reserve asset, and other countries are promoting trade in different currencies. 

Furthermore, South Africa’s financial system is particularly vulnerable considering the country’s low savings rate and consistent capital outflows from its assets. 

This is feedback from the Reserve Bank in its first Financial Stability Review for 2025, which outlines some of the major risks to the country’s financial system.

These risks are closely intertwined with global and local economic factors that may result in a shock to the financial system. 

One of the major risks identified by the Reserve Bank was South Africa’s shrinking capital markets, with money flowing out of the country and a poor local savings rate. 

This increases the vulnerability of the local financial system to external shocks, as it removes a potential buffer against such events. 

As part of this, the bank said that the entrenchment of the US dollar in the South African financial system could present a vulnerability in the form of concentration risk. 

In the Financial Stability Review, the Reserve Bank analysed just how entrenched the greenback is in the local financial system. 

This indicates that the US dollar accounts for 96% of all South African foreign-currency transactions and 98% of its foreign-currency debt. 

Over half of the Reserve Bank’s reserves are held in the US dollar due to its use in global transactions and traditional use as a safe-haven asset. 

In comparison, the next most widely used currency in South Africa’s financial system is the euro, which accounts for 2.2% to 3.9% of foreign exchange turnover. 

The US dollar’s footprint in South African financial activity is evident in the graph below, which shows its usage in various forms as a percentage of the total. 

End of an era

The US dollar’s dominance of global financial markets appears to have peaked, with central banks and countries looking to diversify away from the greenback. 

This does not mean that the dollar will not remain the major global currency and the world’s reserve currency, just that its usage is likely to steadily decline. 

This is feedback from Old Mutual Investment Group (OMIG) portfolio managers, John Orford and Graham Tucker, who produced the asset managers’ annual Long-Term Perspectives report.

One of the longer-term trends identified by Orford and Tucker was the declining use of the US dollar as a reserve currency by central banks and the diversification of investors away from American assets.

This comes after nearly twenty years of US outperformance, with American technology stocks driving most of the returns for investors.

Orford explained that the decline in the usage of the dollar will stem from a myriad of factors, including the country’s excessive debt load, increased policy uncertainty, and higher inflation for an extended period. 

The main driver is likely to be higher inflation in the United States compared to some of its peers, which translates into higher interest rates in the world’s largest economy and makes its assets less attractive. 

When coupled with the United States’ huge debt load and continued deficit spending, yields on U.S. Treasuries and other fixed-income assets are expected to rise. This will increase the cost of borrowing for the US government, crowding out spending in different areas. 

The huge debt load and substantial deficit also weigh on the US’s creditworthiness, resulting in some investors selling out of US Treasury bonds for other assets. 

All of this translates into less demand for the dollar, resulting in a weaker greenback.

Orford explained that this does not mean the dollar is near its end or will collapse, but rather that it might be the beginning of the end for the currency’s superior status.

This has been coupled with central banks seeking to diversify their reserve assets away from the dollar, instead holding gold and other currencies. 

At the same time, the US dollar remains the dominant reserve asset in South Africa, with over half the Reserve Bank’s reserves being held in the currency. 

This is evident in the graph below, followed by a chart illustrating the steady decline of the US dollar as a reserve asset held by central banks.