The US dollar has been dominating the world for decades. But recently, there have been reports regarding the de-dollarisation. Is the world really going to ditch the US dollar that dominated global trade and capital flows for many decades?
You might be having the same question in your mind, right? So, let’s go through this article to analyze and learn more about de-dollarisation. We’ll be discussing how the dollars are going to be replaced with others, which countries are going to ditch dollars, and so on.
De-Dollarisation: Why The World Coordinated To Ditch Dollar?
For many decades, the US dollar has been dominating international trade and the capital flow globally. Recently, many countries have decided to reduce their dependence on the United States. To be independent of the US, several countries have begun to look for alternatives to replace the dollar.
The world’s economy has come to understand the importance of de-dollarization as a strong dollar becomes a risk to the global economy. To combat the effects brought on by the unstable and irresponsible financial policy of the US, many nations have begun their research following their circumstances.
Many nations have begun exploring de-dollarisation to combat the effects that the tightened monetary policy of the US has had on other economies. These efforts include encouraging the diversification of foreign exchange reserves, reducing US Treasury holdings, and using bilateral and multilateral currency agreements to settle transactions in international trade.
The de-dollarisation is not just a decision made voluntarily by other nations; it is a forced reaction to the weaponization of the dollar.
De-dollarisation has risen in importance for those countries as a way to prevent getting drawn into a crisis.
Even though ending the dominance of the US dollar in the global economy is not as simple as we think, the process has already started, and it will gradually get stronger and more evident over time.
As additional nations join, it is now essential for the globe to consider how various nations should cooperate and coordinate their efforts to address the shared problem of US dollar dominance.
The US Dollars: A Quick Peek Into Its Timeline till the De-Dollarisation
After World War I, the United States took over global financial power. As a result, the dollar started to replace the pound sterling as the world’s reserve currency. By then, the United States started to receive a sizable amount of gold imports during the war.
After 44 nations signed the Bretton Woods Agreement, which established a global system of currency exchange tied to the US dollar. It was in turn tied to the price of gold, the dollar soon came to have a significant role in world affairs.
It was challenging to back dollars with gold since there was a large supply of dollars throughout the world. In 1971, President Nixon ended the direct exchange of US money for gold. The US dollar has steadily lost purchase value since then, even though it continues to be the world’s reserve currency.
In the financial crisis in 2007, investors believed that the US dollar would retain its value then. In 2014, Russia announced de-dollarisation due to some western sanctions.
Later several countries came up in the following years, disclosing their efforts to de-dollarisation.
The Nations Stepping Towards the De-Dollarisation
Currently, certain nations and international cooperation organizations, like BRICS, are coordinating de-dollarisation efforts. Developing nations worldwide require a more stable sort of financial mechanism as a new route for carrying out financial transactions in light of the US dollar’s declining dominance. The BRICS and other global forums are attempting to come up with solutions.
As a result of the economic sanctions put in place by the United States and other Western Countries against Russia due to its invasion of Ukraine, Moscow, and the Chinese government have been working together to reduce their reliance on the dollar and to establish a financial system cooperation.
According to the Russian news outlet Vedomosti, Russia, and Iran are also collaborating to introduce a cryptocurrency backed by gold.
Five ASEAN economies agreed in July to plan to establish a regional integrated payment network to dutch the US dollar for direct foreign exchange settlement. This is one of several developments in Asia in July, including the launch of an international trade rupee settlement mechanism by the central bank of India.
The UAE and India are in talks to switch from trading non-oil commodities in dollars to doing so in rupees.
The two biggest economies in South America, Brazil, and Argentina, have recently debated the idea of creating a single currency. Several former Southeast Asian officials discussed ongoing de-dollarisation initiatives at a meeting in Singapore in January.
Thailand, Malaysia, Indonesia, and Singapore established procedures that allow for local currency exchanges rather than dollar exchanges. Taiwanese have access to a QR code payment system through Japan.
Saudi Arabia said that the oil-rich country is open to trading in currencies other than the US dollar for the first time in 48 years.
Is The Global Economy Going To Leave the US Dollars Behind?
Dollarization can no longer be considered an inevitable and mostly insignificant byproduct of global trade. To address the dollarisation and its risks, nations should take a closer look at the phenomenon and develop an extensive and well-coordinated policy agenda.
Policy plans should consider the degree and mechanism of dollarisation. A nation aiming to de-dollarize cannot follow a specific plan exactly. It is important to consider the viability of national objectives in a macroeconomic and comprehensive institutional context because it can be debatable. De-dollarisation could have a negative impact where monetary policies are poor.
The global economy is going to ditch the US dollar soon because the nation has been weaponizing the dollar and the global payment system. Even if the global wild cards continue to persuade leaders to act independently, transactions in alternative currencies are still going in popularity and may continue to do so for many years to come.
The nations collaborating for the de-dollarisation are still in their developing phase. For many countries, de-dollarisation is primarily a political choice rather than an economic one. Countries across the world should adopt a long-term perspective and work to improve de-dollarisation in light of the changing geopolitical scenario and the effects of a strong dollar.