By Ruzeki, Shadow News
08 June 2023, Nairobi
- One of the most intriguing financial trends of 2023 is the de-dollarization movement led by Russia, Brazil, India, China, Africa, Saudi Arabia and Iran. This is an effort to reduce the role of the U.S. dollar in international trade.
- Rivalry with China, fallout from Russia-Ukraine war and the recent wrangling in Washington over the U.S. debt ceiling have put the dollar's status as the world's dominant currency under fresh scrutiny.
- Russia's sanctions-imposed exile from global financial systems last year also fuelled speculation that non-U.S. allies would diversify away from dollars.
- De-dollarization, which is the decline of the United States dollar as the world’s dominant reserved currency, is underway, and it’s gaining momentum all over the world.
For over 100 years, the U.S. dollar has been the world reserve currency, which means it has been the dominant foreign currency held by central banks to carry out international transactions and settle international debt.
However, in the last 20 years, the dollar’s dominance in countries’ reserves has decreased from 70% to 58%, according to the International Monetary Fund.
This trend has been accelerating since 2022, when the U.S. and its NATO allies froze Russia’s dollar reserve as a response of the country’s special operation in Ukraine.
Since then, several countries have been looking for alternatives to the U.S. dollar. Some are discussing the creation of new currencies for international trade, while others are buying an increasing amount of gold to diversify their reserve.
In 1931, amid the Great Depression, the US dollar replaced the Great British pound as the world’s preferred reserve currency.
During world war I & II, the United States supplied the allies with the majority of their weapons and munitions. Most allies paid for the weapons with gold, meaning that by the end of the World War II, the US possessed most of the world’s gold.
This was set in stone in 1944 when 44 countries agreed on the Bretton Wood system. The international delegation agreed to peg the world’s currencies to the dollar rather than to gold since the dollar was itself linked to gold. The US dollar was now the world’s official reserve currency.
Some economists expect de-dollarization to occur as emerging economies in the Global South grow and seek to diversify the composition of their reserve currencies.
In 2021, the International Monetary Fund (IMF) noted that “the US dollar’s share of global reserves has declined”.
There are economic, political, and strategic reasons most countries want to shift away from the dollar. Since the end of the Cold War, the US has been the world’s sole superpower, meaning that the world order has been unipolar.
However, some states like China and Russia would prefer the world to be multipolar, wherein there would exist multiple poles of world power. De-dollarization would assist in the transition from unipolarity to multipolarity.
Another incentive for countries to diversify the composition of their reserve currencies, particularly those with poor bilateral relations with the US, is that the US can wield the preponderance of its currency as a geopolitical weapon.
Sanctions imposed by Washington can be especially potent because of the centrality of the dollar in international finance. Even US allies like Saudi Arabia are wary of US sanctions since their culture could make them a target for Washington’s ire.
One approach to de-dollarization is Local Currency Trade (LCT), whereby states conduct trade with one another using their own currencies. The currencies are converted based on exchange rates.
Earlier this year, China and Brazil announced that they would engage in LCT, as opposed to using the dollar. The BRICS bloc of countries - Brazil, Russia, India, China, and South Africa- is developing a new currency to compete with the US dollar. Moscow and Beijing are aggressively leading the charge toward de-dollarization.
Other countries that have already started trading in their local currencies include United Arabs Emirates, Iran, Pakistan, Saudi Arabia, South Africa, Venezuela, Kenya, Malaysia, Egypt, India, Argentina, Turkey, Zambia, Algeria, Morocco, Afghanistan, and others in the global south.
It is argued with this major development, the value of the dollar is going to lose its sheen very soon. Increased investment in BRICS countries would lead to an increase in spending and economic development. Consequently, it is predicted that if the BRICS nations follow forward with their plan and create a new currency, it might help stabilise their economies.
