Promoting De-Dollarization | 28 Jan 2023

De-dollarisation refers to reducing the dollar’s dominance of global markets. It is a process of substituting the US dollar as the currency used for Trading oil and/ or other commodities, Buying US dollars for the forex reserves, Bilateral trade agreements, Dollar-denominated assets.

The dominant role of the dollar in the global economy provides the US a disproportionate amount of influence over other economies. The US has for long used imposition of sanctions as a tool to achieve foreign policy goals.

The de-dollarisation is driven by the desire to insulate the Central Banks of the Countries from geopolitical risks, where the status of the US dollar as a reserve currency can be used as an offensive weapon.

What are the Challenges with Dollarisation?

• Economic Sovereignty:
  • Many countries believe that their economic sovereignty is threatened by the dominance of the dollar in global trade, as it gives the US government a significant amount of control over the global economy.
• Currency Manipulation:
  • The dominance of the dollar in global trade allows the US government to manipulate its currency to gain an economic advantage over other countries.
• Risk of Financial Crisis:
  • The dominance of the dollar in global trade also increases the risk of a global financial crisis, as a crisis in the US economy can have a ripple effect on the global economy.
• Dependence on US:
  • Global trade is largely conducted in dollars, so countries that deal with the US a lot may become too dependent on the US economy.
• Geo-Politics:
  • Some countries wish to reduce their dependence on the US dollar as it is seen as a way to reduce the US influence on their economy, and in some cases, as a form of resistance against the US dominance.

What are the Advantages of De-Dollarisation?

• Reducing Dependence on the US Dollar:
  • By using other currencies or a basket of currencies, countries can reduce their dependence on the US dollar and the US economy, which can help to mitigate the impact of economic and political changes in the US on their own economies.
• Improving Economic Stability:
  • By diversifying their reserves, countries can reduce their exposure to currency fluctuations and interest rate changes, which can help to improve economic stability and reduce the risk of financial crises.
• Increasing Trade and Investment:
  • By using other currencies, countries can increase trade and investment with other countries that may not have a strong relationship with the US, which can open up new markets and opportunities for growth.
• Reducing US monetary Policy Influence:
  • By reducing the use of the US dollar, countries can reduce the influence of US monetary policy on their own economies.

What are the Challenges with the National Currencies?

• Not Fully Convertible:
  • The challenge for national currencies is that these are not fully convertible. Thus, despite the rise of alternate systems of trade, and multiple currency circulation systems, the dollar still dominates.
• Currency Fluctuations:
  • National currencies can fluctuate in value relative to the dollar, which can make it difficult for countries to plan their economic policies and for businesses to make long-term investments.
• Limited Use of National Currencies in International Trade:
  • The dollar is widely used in international trade, making it difficult for national currencies to compete. This can make it harder for countries to conduct trade with one another and for businesses to expand internationally.
• Dependence on the Dollar:
  • Many countries are heavily dependent on the dollar for trade and financial transactions, which can make them vulnerable to changes in the value of the dollar and to the policies of the US government.
• Financial Instability:
  • The dollar's dominance in the international financial system can contribute to financial instability in other countries, as they may be more susceptible to financial crises.
• Monetary Sovereignty:
  • The hegemonic role of the dollar limits the monetary sovereignty of other countries by making it difficult for them to use monetary policy to stabilize their economies.

What should be the Way Forward?

• Diversifying Foreign Exchange Reserves:
  • Governments can reduce their dependence on the dollar by holding a greater proportion of their foreign exchange reserves in other currencies, such as the Euro or the Chinese Yuan.
• Encouraging the Use of Domestic Currencies in International Trade:
  • Governments can promote the use of their own currencies in international trade by providing incentives for businesses to use them.
    • Since 2019, India has been paying Russia for fuel, oil, minerals and specific defence imports in rupees on an informal basis.
• Developing Alternative Payment Systems:
  • Governments can work to develop alternative payment systems, such as the Chinese-led Asian Infrastructure Investment Bank, that are not dependent on the dollar.
• Building Economic Alliances:
  • Governments can form economic alliances with other countries to reduce their dependence on the dollar.
• Investing in Other Currencies:
  • Governments may invest in other currencies to reduce the risk of currency fluctuations or to counter the hegemony of the dollar.