De-dollarization: Challenging the Reign of the US Dollar in Global Trade

Reserve currencies are international units that are maintained by various financial authorities and central banks to support international transactions. They can also help improve the financial confidence of countries. These reserve currencies are usually characterized by their low volatility and high acceptance in global markets. They can also help improve the financial confidence of countries.

The US dollar has been regarded as the world's most dominant reserve currency since the Second World War. Because of its widespread use in international trade and finance, the dollar has various advantages. These include its low transaction costs and ability to finance deficits more efficiently. The dollar's importance has been attributed to various factors. These include the US' robust economic growth and the country's financial markets.

One of the disadvantages of a reserve currency system that is mainly centered on the US dollar is its potential for creating significant imbalances. For instance, if the country continues to accumulate large debts, it could lead to global economic instability. The dollar's dominance can also cause other countries to adopt different policies and procedures in response to the US' monetary policy. This can result in spillover effects that aren't aligned with their domestic conditions. Countries with large dollar debts might find themselves at risk from capital flow reversals and currency fluctuations.

Several regions and countries have started to move toward de-dollarization due to various geopolitical, economic, or strategic considerations. Some notable examples include Russia, China, Brazil, and the EU. These countries have started to reduce their reliance on US dollar. Russia and China have started to reduce their reliance on the US dollar. They believe that it is a tool for addressing perceived American domination and mitigating the effects of US sanctions. The Eurozone also pursued the de-dollarization of its currency to boost its international economic standing and gain more autonomy.

Another reason why countries and regions are starting to move toward de-dollarization is due to their desire to develop a more resilient and diversified global financial system. This concept aims to minimize the risks that the US dollar can pose to the global economy.

Defiance for dollar:

The impact of de-dollarization on the global financial system should be considered carefully. As countries start to reduce their reliance on the dollar, changes in the composition of their reserve assets could lead to movements in asset prices and capital flows. In the absence of proper risk management and policy coordination, financial instability could occur in countries with large dollar debts. These factors should be monitored by policymakers and taken into account to ensure financial stability.

Creating a reserve currency that can compete against the US dollar has a daunting task. In order to achieve the necessary degree of acceptability, stability, and liquidity, an alternative currency should be supported by a robust economy and a robust financial market. Although the Chinese yuan and the euro have made significant progress in meeting these criteria, a multi-currency reserve system is still needed to address the risks associated with relying on a single currency.

The de-dollarization process could cause volatility in the exchange rates of various currencies. Market participants may start to adjust to the changes in the exchange rate landscape and begin reassessing their positions. This could result in more pronounced movements in the exchange rate, which could affect capital flows, trade, and investment, especially in countries with inadequate policy tools and limited financial markets. Hence, market participants and policymakers must keep a close eye on developments and take necessary measures to prevent disruptions.

The de-dollarization process provides various advantages to the global financial system, its effects on the global economy must be carefully managed. This can help maintain financial stability and economic growth. The process of de-dollarization is linked to the internationalization of other currencies. As the world starts to reduce its reliance on the US dollar, various alternatives are expected to emerge. According to a government official's post, the Chinese Yuan and the Euro are some of the leading candidates to replace the US dollar as the global reserve currency.

The international use of reserve currencies can also provide various benefits. They can help maintain financial stability by diversifying the global financial system's base. One of the most important advantages of this concept is that it can reduce the vulnerability of a single currency to shocks. The internationalization of currencies can also help strengthen the financial autonomy of countries. It can provide them with more policy flexibility and help insulate them from the effects of external factors. The US dollar has become the main topic of discussion in the global economy as major nations have started to stop using the US currency.

The US dollar is the default currency in global trade and is used by major firms and central banks all around the world. Because of this, a significant portion of the foreign exchange holdings of these institutions are in the US dollar. The dollar's prevalence also contributes to the demand for US government bonds. The leaders of the BRICS group, which includes India, Russia, China, Brazil, and South Africa, are currently working on a common currency that would challenge the US dollar. Their move comes as Beijing and Moscow push for the dedollarization of the dollar, which they believe is necessary due to Western sanctions.

The de-dollarization movement has gained momentum in the last couple of years. In 2022, the IMF noted that central banks around the world are no longer holding the US dollar in the same way they used to. This was further boosted by Alexander Babakov, who said that the BRICS nations were working on a new payment method that doesn't rely on the euro or US dollar.

The question is whether the BRICS nations, which include India, are actually working on a new currency. Also, who is leading this movement, and will it benefit the country?

King of Currency:

The US dollar has been referred to as the world's king of currency. In 1944, a delegation from 44 countries decided that the US dollar was the global reserve currency. The dollar's status has greatly influenced the global economy. It has allowed the US to exert a stronger influence than other nations. It has also been used as a tool to impose sanctions on other countries. Some countries, such as China and Russia, don't like the US dollar's dominance. They want to see the end of its use as the global reserve currency. The process of de-dollarization refers to the reduction of the dollar's dominance in the global market. It involves the substitution of the US dollar for other currencies.

Supporters of the de-dollarization movement believe that it can help countries by reducing their dependence on the US economy and the dollar. It can also help mitigate the effects of political and economic changes in Washington on their respective economies. Moreover, it can help financial stability by preventing countries from being exposed to interest rate and currency fluctuations.

According to a recent report by the International Monetary Fund, the US dollar's share of the global foreign exchange reserves decreased last year. This was the second decade in a row that the dollar's share of the global reserves has decreased. The dollar's share of global reserves has not decreased alongside the rise of other reserve currencies such as the euro, the pound, and the Japanese Yen. Instead, the shift has been in two directions. One is toward the Chinese Renminbi, while the other is toward the countries that have limited exposure to the US dollar. Also, in response to Russia's invasion of Ukraine, the western governments froze about $300 billion of its foreign exchange reserves. They also stopped its banks from participating in the international payment system.

The shifted trade transactions to other currencies such as the rupee and the Chinese Yuan, triggered speculations about the possible de-dollarization of the global trading system. Moreover, several countries, including the UK, Russia, Germany, and the UAE, have been allowed to trade in India's rupee. In February, Nouriel Roubini, an economist, noted that the Indian rupee could eventually become a global reserve currency. During an interview with ET Now, an economist known as Doctor Doom said that the rupee could also become a vehicle for India's trade transactions. And it is clear in India's new foreign trade policy (FTP 2023).

Conclusion:

The five BRICS nations, which include India, China, Russia, Brazil, and South Africa, are reportedly working on the establishment of a new currency to help facilitate international trade. It's believed that the financial agreement could be concluded as early as August when the countries hold their annual summit.

According to Alexander Babakov, India and Russia could greatly benefit from the establishment of a common currency that would allow them to conduct payments. He noted that a new economic association between the two countries could be established using a shared currency. China could play a significant role in the development of the new currency by joining the system. The three countries, which include Russia, India, and China, have already established a multipolar world. These countries are focusing on new currency that should be designed to benefit all countries by establishing a strategy that doesn't rely on the US dollar. Brazil has also started accepting investments and trade settlements in the Chinese Yuan. Russia and India also have systems that allow them to settle their dues in rupees instead of euros or dollars.

This indicates that the BRICS nations intend to alter the current system that heavily relies on the US dollar. This could lead to global de-dollarization.

Pic Courtesy-Valery Rabchenyuk at unsplash.com

(The views expressed are those of the author and do not represent views of CESCUBE.)