The US dollar has been the world’s reserve currency, a global unit of account, and the default currency in international trade for decades. However, recent geopolitical tensions and economic imbalances have spurred a growing movement toward de-dollarization, as countries seek to reduce their dependence on the US economy and establish greater financial autonomy.
What Exactly is De-Dollarization?
De-dollarization refers to the process of reducing, eliminating, or substituting the use of the US dollar in international transactions, particularly in the financial and economic systems of other countries. This can be done in many ways, such as reducing the use of the US dollar in trade, using other currencies as an alternative to the US dollar, or promoting the use of a new international currency. The objective of de-dollarization is to reduce dependence on the US economy and mitigate the impact of US sanctions.
Factors Driving De-Dollarization
The onset of de-dollarization did not happen overnight. Various factors have led to the push toward de-dollarization. One of the primary factors is the growing tensions between the United States and other countries. It is no secret that the US sanctions on countries such as Russia, Iran, and Venezuela have had a significant impact on their economies. This has brought about an awakening of sorts for these countries who are now looking for ways to reduce their exposure to the US economy. By reducing their dependence on the US dollar, these countries can avoid the impact of US sanctions and establish greater financial autonomy.
- The BRICS Factor
In recent years, the BRICS countries, which include Brazil, Russia, India, China, and South Africa, have been moving away from the US-dominated global financial system. The bloc has already taken the first step towards creating a new currency by shifting to trade in national currencies. Deputy Chairman of the Russian State Duma, Alexander Babakov, has announced that the alliance is working towards the circulation of a new currency, which could be digital or in any other form. The value of this new currency will be pegged to not just gold but also other groups of products like rare-earth minerals or soil.
The BRICS countries already account for 40% of the global population and one-fourth of the global GDP. The alliance is set to expand with Iran and Saudi Arabia initiating the formal process to join, and over 10 other countries, including Egypt, Algeria, the UAE, Mexico, Argentina, and Nigeria, expressing interest in joining the bloc.
Another factor driving de-dollarization is the ongoing trade imbalances between the United States and other countries. The US has been a long-standing net importer, meaning that it imports more goods than it exports. This has led to a significant trade deficit, which is financed partly by the US dollar’s role as the world’s reserve currency. However, countries that export more than they import, such as China, have a significant surplus of US dollars, which they are looking to invest in other currencies and assets. This has led to a growing movement toward using other currencies, such as the Chinese yuan, as an alternative to the US dollar.
Recent Events Accelerating De-Dollarization
- The pandemic led to significant disruptions in global trade and financial markets. The unpredictability of the dollar’s value during the response to the financial crisis and the frenetic response to the outbreak of COVID-19 has led to an interest in exploring alternative reserve currencies. One way to do this is to reduce reliance on the US dollar and establish greater financial autonomy.
- China and Brazil’s recent agreement to settle trades in each other’s currencies marks another blow to the central role of the US dollar in global trade. The shift from dollars to a yuan-real settlement basis in Chinese-Brazilian trade is the latest trend in a growing movement towards de-dollarization. The move has been driven by several factors, including the conscription of the dollar in economic warfare, error-fraught monetary policy regimes, and discussions of a more politically neutral reserve currency.
- Brazil also began talks with Argentina for a common currency. This was part of a coordinated bid to boost regional trade and reduce their reliance on the U.S. dollar.
- The economic disruption experienced by Iran and Russia, after being evicted from dollar-based trading systems like SWIFT, has led many nations to consider contingency plans.
- India and Malaysia have recently begun using the Indian Rupee to settle certain trades. India paid for Russian oil in non-dollar currencies like the UAE dirham and Russian ruble, after an oil price cap was imposed on Russia. In addition, there have been perennial warnings about Saudi Arabia and other energy exporters moving away from the dollar.
Other Aspects Influencing De-Dollarization
Some of the proposed alternatives to the US dollar include cryptocurrencies, central bank digital currencies, or baskets of commodities representative of a given nation or region’s competitive advantage. The latter scenario involves certain African nations trading in currencies backed by titles to rare earth metals, some South American nations in currencies backed by copper deposits, and so on. However, this proposal faces substantial hurdles. Nevertheless, there is an increasing focus on increased cooperation between Brazil, Russia, India, China, and South Africa, which has touched on just such a plan. This could provide an alternative to the US dollar and other national currencies.
Another factor is the growing role of emerging economies such as China and India in the global economy. These countries are becoming increasingly influential, and they are looking for ways to reduce their dependence on the US economy and establish greater financial autonomy.
Where Does the Dollar Stand Now?
De-dollarization is a growing movement that is driven by a range of economic, political, and geopolitical factors. While de-dollarization offers some benefits, such as reducing dependence on the US economy and mitigating the impact of US sanctions, it also presents significant challenges, such as increased transaction costs, volatility in exchange rates, and difficulty in accessing international financial markets.
One of the most significant implications of de-dollarization is the potential for a shift in the balance of power between the United States and other countries. The US dollar’s dominance in the global financial system has long been a key source of US power and influence, and a reduction in the use of the US dollar could lead to a decline in US influence. This could have significant geopolitical implications, particularly in regions such as the Middle East and Asia, where the US dollar has traditionally played a significant role.
Another implication of de-dollarization is the potential for increased financial instability. The use of multiple currencies in international transactions could lead to greater volatility in exchange rates, making it more difficult to manage financial risk. Additionally, countries that are heavily invested in US dollars may face significant losses if the value of the US dollar declines.
Despite these challenges, the push toward de-dollarization is likely to continue. As countries seek to establish greater financial autonomy and reduce their dependence on the US economy, they will continue to explore alternatives to the US dollar and promote the use of other currencies in international transactions.
While the dollar will likely be around for a long time, the political will to moor US fiscal and monetary policies to those consistent with the constitution of sound money remains an inconvertible matter, driving the shift towards de-dollarization. Ultimately, the dollar’s fate as the world’s reserve currency will be determined by the response to the ongoing trend toward de-dollarization.