DE-DOLLARISATION

The weaponization of trade

• Countries need to reduce their reliance on the US dollar to protect their economies from sudden policy changes or geopolitical tensions that result from US monetary policies and sanctions.
• This necessity is evident in Russia’s push for de-dollarisation due to the impact of US sanctions on its economy.  

Monetary Sovereignty breach: 

• There is a need for countries to establish greater control over their monetary policies and enhance their financial autonomy.
• This can be achieved through de-dollarisation, as demonstrated by China promoting the use of the yuan in international trade to increase its economic influence and independence.  

Global Financial Instability

• The need for de-dollarisation arises from the desire to create a more diverse global reserve currency system, reducing the risks associated with overreliance on a single dominant currency like the US dollar.
• The European Union’s efforts to increase the international use of the euro are driven by this need for greater financial stability.  

Exposure to Currency Fluctuations

• Dollarisation has increased countries’ exposure to currency fluctuations resulting from the US dollar’s volatility.
• For example, countries with high levels of dollar-denominated debt can be severely affected by fluctuations in the US dollar’s value, leading to increased debt servicing costs and financial instability.  

4. Advantage of Reserve Currency

• Other currencies such as the British pound and the French franc have served as international reserve currencies in the Past.
• It should be noted that it is the currencies of economic superpowers that have usually ended up being used as the global reserve currency.
• As the economic clout of these countries waned, their currencies faced a similar downfall. This was the case, for example, with the British pound which was gradually replaced by the U.S. dollar as Britain lost its status as a global economic superpower in the first half of the 20th century.
• Others point to the expansionary monetary policy adopted by the U.S. Federal Reserve over the decades to argue that this could threaten the U.S. dollar’s status as a global reserve currency.
• The U.S. central bank usually increases the supply of dollars through various means to tackle economic downturns and also to fund the U.S. government’s expenditures.
• But it should be noted that the U.S. Federal Reserve is not the only central bank in the world that has been debasing its currency by engaging in expansionary monetary policy over several decades.
• Other countries have also been expanding their respective money supplies to address their domestic economic problems.
• As long as the U.S. does not debase its currency at a faster pace than other countries, the dollar may manage to hold its value against other currencies and hence its reserve currency status may not come under serious threat.

5. The dominance of the US dollar in the global trade

• The USD accounts for approximately 90% of all Forex transactions. That means that the dollar was one on one side or the other in nine out of 10 global foreign exchange transactions.
• The dollar also accounts for 85 percent of all currency forward and swap markets.
• Almost half of all cross-border loans and international debt securities are also denominated in international debt issuance.
• The dollar is also used for about 50% of all trade invoicing despite the US only accounting for about 12% of global trade.
• The USD comprises 60% of global Forex reserves.

6. Possible implications of De-dollarisation of global trade

• The status of the reserve currency allows the US government to refinance its debt at low costs in addition to providing foreign policy leverage.
• Currently, about 60 percent of foreign exchange reserves of central banks and about 70 percent of global trade are conducted using USD. Thus, a de-dollarized market may reduce such kinds of monopolies.
• US dollar has been repetitively used as an economic weapon against adversaries of Western countries for a long time. E.g., sanctions on Iran, and sanctions on Russia. De-dollarisation will make this step ineffective.
• The notion of de-dollarisation can be instrumental in creating a multipolar world. Each country will look to enjoy economic autonomy in the sphere of monetary policy.
• Dollar supply changes and any impact on the US banking system create ripples around the globe. For example, the 2008 global financial crisis. De-Dollarization will reduce the global impact of the US financial market.
• It might turn the attention of countries towards digital currencies, which are not under control or linked to any country.

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