Navigating the Shift: Understanding De-Dollarization and Global Currency Dynamics

SYNOPSIS 

De-dollarization is a process of moving away from the world’s reliance on the US dollar(USD)  as the chief reserve currency. The dollar has been prominent and  remained the primary  reserve currency and exchange  for international business since world war II. There have been a couple of discussions regarding the reduction of dependency of the US dollar and its possible impact towards the global economy. 

REASONS BEHIND DE-DOLLARISATION 

There are several reasons for de-dollarization some of them includes:

1. Since recent years the US dollar has been subjected to fluctuations in the value and operates in a fiscal deficit . There had been concerns regarding inflation as well. 

2. There had been involvement of the US in certain conflicts of war; these potential interference has led to countries using less of the dollar.

3.  China , which is famously known as the second superpower, is promoting the use of the currency renminbi and is influencing global trade.

4. With the introduction of cryptocurrencies,  like  Bitcoin, it has evolved into a digital currency that has made people interested and they see it as an alternative to the dollar.

5. The U.S. holds a global influence as  the U.S. dollar is a dominant reserve currency hence , the U.S. significant economic leverage,  the authority to print more money if required. Few countries feel alienated as they feel that they have potential constraints by law. 
   

HOW DE-DOLLARISATION TAKES PLACE?

Countries that have the motive to reduce their dependence on the US dollar. The countries can hold their gold reserves or enter in agreements with the other countries for using a preferable or alternative strong currency and hence avoiding the use of dollars in their international transactions. 

De-dollarization  opens the market and gives opportunities for the countries to trade with their indigenous currency. However,  It largely depends on the stability of the currency reserves.

ADOPTION OF DE-DOLLARSATION BY BRICS AND SCO

Over the years  after the war in Ukraine because of sanctions and trade conflicts , countries who are in BRICS like China, Russia are leading their steps towards de-dollarization. The  BRICS nations, including Brazil, Russia, India, China, and South Africa, were deliberating about the creation of a new currency. In fact, BRICS countries, accounting for over 40% of the world's population and have a combined GDP that exceeds the G7, are accumulated gold in preparation for this new currency.  As the countries move towards de-dollarization they reduce dependence on the U.S. dollar, central banks  may initiate selling their dollar reserves, leading to hyperinflation, higher interest rates, and falling asset prices in the U.S. 

The Shanghai Cooperation Organization (SCO) and BRICS,  were involved with the promotion of local indigenous currencies for international trade. This came into play when the sanctions on Russia were imposed , China's President, Xi Jinping,  advocated the use of local currencies. To accomplish this goal  , in the SCO Summit in September 2022, Xi proposed using local currencies in trade settlements,  a tool for boosting  cross-border payment systems, and establishment of  an SCO development bank.

In a December 2022 address, Xi Jinping  promoted the use of the Chinese currency, renminbi, for trading oil and natural gas in collaboration with the Gulf Cooperation Council (GCC). Interestingly, The  China National Offshore Oil Corporation (CNOOC) completed the world's first cross-border liquefied natural gas (LNG) trade settlement in renminbi. Through adopting existing cross-border messaging standards, China aims to make CIPS a critical piece of the world’s existing financial infrastructure to promote international use of the renminbi. 

By 2023, CIPS’s annual business transaction volume reached 123 trillion renminbi (roughly $17.3 trillion), according to data on the CIPS  website.  The CIPS  has 139 direct participants and 1,345 indirect participants worldwide; mostly there are foreign branches of Chinese banks. Conclusively, China aims to make its currency more influential in international transactions and reduce dependence on the U.S. dollar.

Even India has promoted de de-dollarization and make its presence on the global platform. India aims to foster balanced and economic relations with other relations. India is open to formulate more relations and have more trade partners. Hence, India is promoting the Indian rupee for international trade. This helps India to reduce potential risks related to changing exchange rates and gives India better chances to negotiate profitable trade deals. It also protects the Indian economy from economic shocks and enhances economic stability.

From January to October almost 68% of Russian trade was made using the respective national currencies of the two countries. Russia has used the yuan(currency of China) in trade transactions with Mongolia, the Philippines, Malaysia, the United Arab Emirates, Thailand, Japan, Tajikistan and Singapore. There were discussions  about the need to de-dollarize Global South economies.

CHALLENGES OF DE-DOLLARIZATION

Firstly, this is a major transition and its a very complex and challenging process.

If the new currency is not seen as being as stable it can hinder the economic stability. Formation of trust on the currency is important. A lot of commodities, such as gold and oil, are priced and traded in dollars. Hence, shifting from dollar is complex process.

Countries with instable financial system or effective tools for economic policies, might struggle to control the fluctuations in currency values during the shift away from the U.S. dollar. It is vital to curb these challenges for smooth functioning of the economy.