Dedollarisation
Introduction:
- Dedollarisation refers to a reduction in the dollar’s sway over world markets. The US dollar is utilised in this process in place of other currencies for:
- commodity transactions, such as oil.
- acquiring US dollars to add to the FX reserves.
- bilateral agreements for business.
- assets with a financial value.
The current situation is:
- Many countries have been attempting to dethrone the dollar as the world’s reserve currency for many years.
- But lately, dedollarisation efforts have picked up speed in response to Russia’s invasion of Ukraine last year.
- Many countries perceived the United States’ implementation of sanctions that restricted the use of the dollar to purchase Russian oil and other goods as an effort to weaponize the currency.
- The United States government has considerable jurisdiction to oversee and control these transactions because American banks clear overseas transactions in dollars.
Recognization of the US dollar:
- No one is required to use the US dollar as a means of exchange for international trade, according to many economists. They note that the U.S. dollar is widely used in foreign transactions because people actually prefer using American money over other currencies for a variety of economic reasons.
- The popularity of the U.S. dollar around the world has mostly been attributed to the appeal of American assets to investors. The high level of confidence that international investors have in the U.S. financial markets, maybe as a result of the “rule of law” in the U.S., is one of the primary reasons why investors prefer to invest in U.S. assets.
Concerns about dollarisation:
- According to several countries, the dollar’s hegemony in global trade jeopardises their economic independence.
- It is justified for many countries to dedollarize because the dollar has unfair advantages over other currencies due to its role as the global reserve currency.
- It gives the country the opportunity to purchase products and other assets from the rest of the world by simply creating fresh money out of thin air.
- Due to the dominance of the dollar in global trade, the US government is able to manipulate its currency to gain an economic advantage over other countries.
- The dollar’s monopoly in global trade also raises the possibility of a financial catastrophe on a global scale.
- Nations that do a lot of business with the US run the risk of becoming overly dependent on the US economy because the majority of international trade is conducted in dollars.
- government actions in a number of nations:
Worldwide Initiatives:
- Bilateral currency exchanges between ASEAN, African, and Latin American countries.
- Trade in National Currencies Has Started, for Example: The New Development Bank of the BRICS Encourages Investment and Trade in National Currencies.
- India’s Efforts: In 2022, the Reserve Bank of India (RBI) proposed a rupee settlement mechanism for international trade as a first step towards the internationalization of the rupee.
Moving forward:
- The world does not want a straightforward change in authority or to be subjected to the same schemes, even if they come from a different nation. The only way to proceed would be to diversify the currency market and prevent any one currency from gaining control.
