The Shift Toward De-Dollarisation

The global trend towards de-dollarisation refers to the efforts by various countries to reduce their reliance on the US dollar in international trade and finance. This editorial, based on the article Why ‘De-Dollarisation’ is Imminent, explores the causes and consequences of this shift, with a particular focus on the role of major global players like Russia, China, and India.

What is De-Dollarisation?

De-dollarisation involves reducing the dominance of the US dollar in global markets, particularly in the following areas:

• Trading commodities like oil
• Building foreign exchange reserves
• Bilateral trade agreements
• Holding dollar-denominated assets

The dollar’s current prominence has granted the US considerable influence in global financial systems. However, the use of dollar-based sanctions has prompted countries to seek alternatives to mitigate the risks associated with relying on the US-dominated financial system.

Causes Behind the Dollar’s Prominence

The US dollar became the dominant global currency in the 1970s after the US made a deal with Saudi Arabia to conduct energy trade in dollars. The collapse of the Bretton Woods system further solidified the dollar’s position, leaving it with little competition from other major currencies.

• Global Reserve Currency: Approximately 60% of global forex reserves and 70% of international trade transactions are conducted in US dollars.
• Safe-Haven Status: The dollar is often seen as a relatively risk-free asset, encouraging its widespread use.
• Risk of Dumping: Rapid liquidation of dollar-denominated assets by adversarial central banks could damage their balance sheets, limiting the appeal of non-dollar assets.

Despite some alternatives like the Euro and gold, many currencies still carry inherent risks, especially in the context of geopolitical tensions.

Efforts Toward De-Dollarisation

Countries like Russia and China, in particular, have made concerted efforts to reduce their reliance on the US dollar:

• Russia: Following sanctions imposed after the annexation of Crimea in 2014, Russia began to reduce its dollar-denominated assets, dropping the share to 16% by 2021. Russia also shifted away from the dollar in trade, especially with BRICS countries, where the share of dollar-based trade fell dramatically.
• China: China is promoting de-dollarisation by creating RMB trading centers and pushing for the adoption of its digital currency, the e-Yuan. It has also worked to include the Chinese Renminbi (RMB) in global financial institutions, such as the IMF’s Special Drawing Rights (SDR) basket.

Both countries are exploring alternative payment systems to bypass the US-controlled SWIFT network, with Russia implementing the SPFS and China using the CIPS for cross-border transactions.

India’s Position on De-Dollarisation

India has been exploring alternatives to the dollar in its international trade. In the past, it has engaged in barter arrangements with countries under sanctions. India and Russia are now considering using the Chinese yuan for oil trade, although the lack of convertibility of the yuan and the Indian rupee presents challenges.

Challenges:

• Currency Non-Convertibility: Both the Indian rupee and the Chinese yuan are not fully convertible in international markets, which complicates their use in global trade and restricts liquidity.

Potential Solutions:

• India could increase its foreign exchange reserves in euros and gold.
• Digital currencies could offer a way to bypass traditional banking systems and reduce dependence on the dollar.
• India could explore transactions in national or digital currencies with countries in organizations like BRICS and the Shanghai Cooperation Organization (SCO).

Conclusion

While the US dollar remains the preferred currency for global trade due to its liquidity and stability, the rise of economic powers like China and India, combined with the increasing weaponization of the dollar for foreign policy objectives, will accelerate the process of de-dollarisation. However, the transition will require a diversification of the global currency market to prevent any single currency from monopolizing global commerce. Only by promoting a multi-currency system can the world reduce reliance on the US dollar and safeguard against its political manipulation.