Since the start of 2023, there have been many events related to reducing dependence on the US dollar. Examples include Russia and Iran jointly introducing cryptocurrencies into international trade, Saudi Arabia allowing the sale of oil in currencies apart from the US dollar, Argentina and Brazil planning to determine common currencies, and Brazil and China agreeing to avoid using the US dollar as an intermediary currency.
The term “de-dollarization” has gained a variety of attention, especially because the globalization of the Chinese renminbi continues. There are two important short-term aspects accelerating de-dollarization.
First, the conflict between Russia and Ukraine has led to the United States imposing financial sanctions on Russia from February 2022. The imposition of those sanctions, combined with criticism from various organizations and public figures reminiscent of the International Monetary Fund, has undermined confidence within the dollar and euro in lots of parts of Europe.
Second, the U.S. budget deficit and national debt have raised concerns. The US budget deficit reached 15% in 2020. GDP as a result of the Covid-19 pandemic. Moreover, the national debt has increased from $10 trillion in 2008 to $31.4 trillion, raising questions on the long-term stability of the dollar.
De-dollarization also includes adjustments to investment portfolios made by global investors. If confidence within the dollar weakens, investors will naturally reduce their US dollar-denominated financial assets.
Two long-term aspects influence de-dollarization. First, the U.S. share in global GDP and foreign trade has declined significantly. After World War II, the United States accounted for 56 percent of worldwide GDP, but by 2020 that had dropped to 24 percent. Similarly, the US share in world trade dropped from 32%. to lower than 10 percent This decline has opened up opportunities for other currencies to compete for larger roles on the international stage, weakening the dollar’s position.
Secondly, the rise in prices of other currencies also played a task. Unlike the post-World War II era when the US dollar and British pound were the dominant world currencies, there at the moment are more currencies competing for significant positions, including the euro and other non-traditional reserve currencies. This further weakens the position of the dollar.
De-dollarization is a long-term process and has three important explanation why it’s value continuing. Firstly, there have been more declarations about de-dollarization than actual actions. Most statements express a willingness to explore alternative settlement currencies, but trading stays based on the US dollar. However, the increased use of other currencies for settlements and reserves could help countries diversify and reduce the risks related to over-reliance on the US dollar.
Second, the role of the dollar in the worldwide monetary system has varied up to now. Its dominance has modified over time, and its share on the planet’s reserve monetary system has ranged from zero to as much as 84 percent. It currently stands at 58.4 percent, however the recent de-dollarization trend doesn’t guarantee an enduring change. The dollar’s share may rebound in the longer term.
Third, despite the decline within the dollar’s status as a reserve currency, it still maintains a big advantage over other currencies. The U.S. dollar accounts for 88 percent of worldwide foreign exchange transactions, and its overseas dollar market has grown from $7.8 trillion to $8.3 trillion lately. The U.S. economy stays strong, especially its well-developed financial market, which provides it a bonus by way of economic scale, liquidity and credibility.
The current international reserve system, established on the Bretton Woods Conference in 1944, revolves across the US dollar. Although the system collapsed in 1973, the dollar’s dominant position because the international reserve currency remained largely unchanged as a result of the highly developed and open financial markets within the US. However, this dollar-centric system is inherently unstable and unfair, as evidenced by the “Triffin Dilemma” and the more moderen “New Triffin Dilemma.” The spillover effects of US monetary policy and its impact on global financial stability have created challenges for the remaining of the world.
China goals to construct a diversified reserve system through which the internationalization of the renminbi (RMB) plays a key role. To achieve this, China should ensure sustainable and stable economic growth through reform and opening up, strengthen its comprehensive strength, reform the domestic financial market, deepen the opening of the financial market, and speed up the event of treasury bond and currency derivatives markets. China may facilitate the bilateral opening of monetary accounts and improve market-oriented reform of the exchange rate system to extend the pliability of the RMB exchange rate.
Source:
De-dollarization is gaining momentum amid the yuan’s greater role. (2023, June 12). Star. https://www.thestar.com.my/business/business-news/2023/06/12/de-dollarisation-picks-up-pace-amid-bigger-yuan-role
China steps up de-dollarization drive as world central banks use record amount of yuan. (n.d.). Market expert. https://markets.businessinsider.com/news/currency/china-de-dollarization-dollar-dominance-global-central-banks-currency-yuan-2023-5
