Is the US Dollar losing its Dominance? (De- Dollarization)
A globe growing more multipolar is witnessing an acceleration of the de-dollarization movement. Policymakers in India have taken note of it and are currently looking into methods to lessen their nation’s reliance on the US currency. Because of the dollar’s hegemonic status in the world economy, several nations, including India, may face geopolitical and economic challenges. Let’s talk about the de-dollarization movement and the difficulties it presents. The process of lowering or doing away with the usage of the US dollar in cross-border trade or a nation’s economy is known as “dollarization.” Reducing reliance on the US dollar and minimizing the hazards related to a dominant global currency are the objectives.
Why de-dollarize?
-To lessen reliance on the dollar: Using the US dollar is essentially handing the US government authority over a nation’s economy. This might become an issue if the US chooses to implement economically damaging policies, including applying sanctions or hiking interest rates.
-In order to guard against inflation: The US dollar is not resistant to increases in price. In actuality, the dollar’s worth has decreased recently. For nations that rely on the dollar, this might make it challenging to plan their economies and budgets for the future.
-To encourage economic expansion: According to some economists, de-dollarization can result in economic expansion. This is due to the possibility that it will facilitate international trade and economic investment.
How to de-dollarize
-Diversify your foreign exchange reserves: By putting aside money in currencies other than the dollar, such as the euro, yen, or yuan, a nation can lessen its reliance on the dollar.
-Encourage local currencies to be used in international trade: Promoting local currencies to be used in international trade can assist in decreasing the demand for dollars and enhance the use of other currencies.
-Sign currency swap agreements: By agreeing to exchange currencies with other nations, trade can be settled in local currencies, negating the need for dollars.
-Encourage the building of gold reserves: Investing in gold can offer a substitute for keeping foreign exchange reserves denominated in dollars, which can lessen dependency on the dollar.
What are the challenges of de-dollarization?
The most widely used reserve currency is the US dollar. The majority of global trends are expressed in US dollars. With almost 20% of global foreign currency reserves, the euro is currently the second most widely held reserve currency. In other words, it essentially takes a long time for the second-most valuable currency to overtake the US dollar. The globe is de-dollarizing, but the process is going extremely slowly.
-The price of changing currencies: Changing currencies can be costly for a nation. This is due to the fact that they must convert their current debt into a new currency and purchase fresh reserves of the new currency.
-Deviating from the dollar may lead to a rise in currency volatility because other currencies might be less stable or more erratic than the dollar.
-Restricted options: Given how widely used and trusted the dollar is around the world, there might not be many alternatives to it as a reserve currency.
Conclusion
It’s too soon to tell if de-dollarization will be effective. Nonetheless, it is evident that de-dollarization is the tendency. A growing number of nations are searching for methods to lessen their dependency on the US dollar. De-dollarization will significantly affect the world economy if it is effective. De-dollarization initiatives could have a significant good and bad impact on the world economy if this trend persists and is effective.
Citation-
https://www.jpmorgan.com/insights/global-research/currencies/de-dollarization
https://www.investopedia.com/what-is-de-dollarization-7559514
