In the last year, the term de-dollarization has gained pace. If you read the news, it seems that the entire world is in a race to ditch the dollar. Recently, Brazilian President Lula asked why we are trading in US dollars. This concern is shared by many people, especially in the Global South. Many countries in Asia are now considering settling bilateral trade in other currencies. The Malaysian Prime Minister flouted the idea of setting up an Asian monetary fund to reduce its dependency on the dollar.
This discussion gained pace after the Russian aggression against Ukraine in February 2022 and the accompanied sanctions that hit Russia, which are said by some to be the harshest on record. And not only that, the sanctions froze the assets of the Russian Central Bank as well. This irked many countries, especially those that did not share good relations with the US anyway, fearing that the US might do the same to them. Therefore, they began diversifying their exchange reserves. Slowly, some countries started ditching US dollars for trade, while BRICS (Brazil, Russia, India, China, and South Africa) countries are working on a new mechanism to facilitate trade without the US dollar. The world is becoming more multipolar, with each country wanting to exert dominance, hoping to be the main shaper of the new world order after the end of the war in Ukraine.
One way people think that the US supremacy could come to an end is by ending the dominance of the US dollar. The other question that comes up simultaneously is who would fill the void left by the US dollar.
On the other hand, the Yuan becoming the world currency would be a horrible mistake for China, as the Bank of China doesn’t have the necessary power to hold the Yuan stable once it is traded openly on the global market(White & Zhou, 2019). And if history is any indication, with China being accused of currency manipulation and artificially deflating its currency on many occasions, the Yuan being a global currency won’t bode well.
The recent failure of the Rupee-Ruble mechanism highlights the challenges of trying to get rid of the US dollar. The rupee-ruble mechanism was set to ease the trade of crude oil between Russia and India in an effort to bypass the US dollar. However, the post-sanctions weakening of the Ruble and the exposure of Indian banks to global sanctions has made the mechanism difficult. Russia did indeed end up having a huge trade surplus with India –the problem being that the money was in Indian Rupees and Indian banks, making it difficult for Russia to access it. Moves to use other currencies are also in limbo, as neither country seems to agree to use one currency. Future trade between countries could run into danger if they do not agree on a solution.
This reinforces the fact that getting rid of the US dollar is easier said than done. As much alluring as it sounds at first glance, China would not appreciate its currency being used for trade on the global market. That being said, bilaterally, countries may start ditching the US dollar, which comes with its problems, as mentioned before, making multilateral trade potentially an even more difficult endeavor without the US dollar.
However, things might differ if countries are willing to take the economic falls that might come out of ditching the dollar. For many countries, geopolitical considerations will trump the economic sense. If this is the case, the future is one to keenly look out for.
Albeit imperfect, the lack of clear alternatives is what keeps the dollar at the top. Geopolitical trends could change it, but for now, the dollar is still the king.
Adithyan Puthen Veettil holds a Bachelor’s in economics and is a student doing his master's in international studies at the Diplomatic Academy, Vienna. Adithyan was spring intern 2023 at the Austrian Economic center.
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