-By Tamanna Verma, Editorial Member
For as long as we can remember, the US has always been among the most powerful and developed countries in the world. It has ingrained itself into the economy of a majority of countries and has made the dollar one of the strongest currencies worldwide. However, even the mighty can fall and over recent years studies have shown that the dollar is losing its value. The US dollar used to be the world’s primary reserve currency, and it was also the most widely used currency for trade and other international transactions. However, its hegemony has come into question in recent times due to geopolitical and geo-strategic shifts. There have been speculations that the US dollar reserve is being eroded as the world divides itself into trading blocs after the Russia-Ukraine war and due to the increased strategic competition between the US and China.
De-dollarization means reducing the use of dollars in transactions relating to trade between countries as well as financial transactions. This would diminish the dominance of the US in the foreign market. There are two cases which would erode the value of the dollar. Firstly, reducing the stability offered by the US dollar which makes it the most desirable form of currency for trade. The second factor involves positive developments outside of the US that boost the credibility of alternative currencies.
Fundamentally de-dollarization would shift the balance of power between the countries, and this could reshape the global economy. The countries would be less compliant to use the dollar as a mode of payment which would in turn reduce its credibility in the market negatively affecting the position of the US on the power scale. De- De-dollarisation is already imminent in commodity markets where energy transactions are increasingly priced in non-USD currencies. As the saying goes you can’t put all your eggs in the same basket, the need for diversification is felt because there is a need to reduce over-dependence on the dollar and during recent years, the dollar has become a problematic currency. Central banks are increasing their gold holdings to lessen the dependency on the dollar. Increasing gold holdings reduces the need to maintain reserves of the US dollar which in turn provides the country with more money to invest in domestic projects.
China is a country which has dominated the commerce market for quite some time and can be seen as a favourable alternative to the use of dollar. China has made the most progress in using its currency yuan for international trade. The yuan’s share of international payments reached a record high in July. The Chinese currency has become the fifth largest currency in the world for reserves, payments and trading, and the third-largest currency for commercial financing. In Latin America, Bolivia is one of the most recent cases of countries adopting the yuan for trade transactions. Last year, the period from April to June was the first quarter in history in which the use of the Chinese currency surpassed the use of the dollar in the country’s bilateral trade. The sanctions against Russia partly explain this shift. Also Project mBridge is a multi-central bank digital currency (CBDC) platform that connects central and commercial banks across China, Hong Kong, Thailand, the United Arab Emirates and Saudi Arabia without relying on the dollar. Moreover, the use of cryptocurrency can also be seen as an alternative use for dollar.
Diversification away from the dollar is a growing trend, but we find that the factors that support dollar dominance remain well-entrenched and structural in nature. Change is not an overnight process, dollar has been used as a form of trade currency for years and even though its stability has faltered in modern times it still hasn’t lost its value continues to dominate foreign reserve holdings, trade invoicing, and currency transactions globally. There are several countries that depend on dollar for incurring various transactions and dollar is still seen as a universal currency all over the world. Setting a currency as an alternative to dollar seems like a strenuous task as there are concerns around macroeconomic stability and fiscal consolidation. Hence de-dollarization risks do appear exaggerated but not completely out of context, though it’s going to take a long time to see any meaningful erosion of dollar.
Sources-
https://www.jpmorgan.com/insights/global-research/currencies/de-dollarization
Editorial Board 