The dollar has served as the world’s dominant reserve currency since World War II. At present, the dollar is the primary currency used in cross-border transactions, held by central banks in reserves, and traded in foreign exchange markets. It gives the US a dominance in the international financial market. Many countries like Russia and China are making efforts towards ending the dominance of dollar i.e. De-dollarization.
How de-dollarization will change the global economic scenario?
- The status of the reserve currency allows the US government to refinance its debt at low costs in addition to providing foreign policy leverage. Currently, about 60 per cent of foreign exchange reserves of central banks and about 70 per cent of global trade are conducted using USD. Thus, de-dollarised market may reduce such kind of monopolies.
- US dollar has been repetitively used as an economic weapon against adversaries of western countries for a long time. E.g., sanctions on Iran, sanctions on Russia. De-dollarization will make this step ineffective.
- The notion of de-dollarization can be instrumental in creating a multipolar world. Each country will look to enjoy economic autonomy in the sphere of monetary policy.
- Dollar supply changes and any impact on the US banking system create ripples around the globe. For example, the 2008 global financial crisis. De-Dollarization will reduce the global impact of US financial market.
- It might turn the attention of countries towards digital currencies, which are not under control or linked to any country.
However, everything after de-dollarization may not be positive, it will also have some negative effects.
- No other currency in the world is at a level that can replace the US dollar as an international currency in the near future. It might result in instability in the world economic system and also conflict among countries over valuation of currencies.
- The US might see the move as a challenge, which may lead to an eruption of economic war between world powers.
- It might also lead to the increasing usage of currencies of authoritarian countries like China and Russia, with lesser transparencies in currency valuation systems.
De-dollarization is vital for providing a level playing field for the developing economies. It will not only offer monetary autonomy to the countries but also decrease the vulnerabilities of foreign influence.