WHAT IS MEANT BY DE-DOLLARIZATION

Saturday Brain Storming Thought (249) 16/11/2024

DE-DOLLARIZATION

De-dollarization refers to countries reducing reliance on the U.S. dollar as a reserve currency, medium of exchange or as a unit of account

Key Takeaways of De-dollarization

1) De-dollarization entails a significant reduction in the use of U.S. dollar in world trade and financial transactions

2) Some signs of De-dollarization are evident in the commodities space, where energy transactions are increasingly priced in non-USD currencies

3) Globally, new payments systems are facilitating cross-border transactions without the involvement of U.S. banks, which could undermine the dollars clout

4) USD’s share of FX reserves – the most commonly analyzed barometer of dollar dominance – had decreased, notably in emerging markets

5) However, while diversification away from the dollar is a growing trend, the factors that support dollar dominance remain well-entrenched and meaningful De-dollarization will likely take decades

Reasons for De-dollarization Globally

1) Geopolitical tensions and sanctions – The US has a history of using economic sanctions as a tool for foreign policy

2) Loss of faith in the US economy

3) Development of alternative financial systems

4) Volatility in the US dollar

5) US influence on Global Institutions – US holding a significant number of voting shares in both the IMF and World Bank resulted into having a significant influence on the decisions of these institutions

6) Currency Manipulation – the dominance of the dollar in global trade allows the US government to manipulate its currency to gain an economic advantage over other countries

Analyzing the countries and entities driving the push for De-dollarization

1) Russia and China – have already started the process of De-dollarization

2) Russia has decreased its holdings of assets dominated in US dollars to approximately 16% in the year 2021

3) Russia significantly decreased its reliance on USD

4) China is promoting the use of its own currency in international trade

5) India has agreed to trade with 18 countries using INR, including Germany, Kenya, Sri Lanka, Singapore, the UK and many other countries

6) The oil giant Saudi Arebiya is open to discussions about trade in currencies other than the US dollars

7) BRICS nations are in the process of creating a new medium for payments and BRICS currencies

Advantages of De-dollarization

1) Reduced dependency on US Dollar

2) It can make international trade more efficient and accessible

3) Countries won’t need to convert their local currencies into US dollars

4) Greater monetary policy independence

5) Countries may achieve more autonomy in their monetary policies without the influence of the US dollars fluctuations

Disadvantages of De-dollarization

1) Potential economic instability

2) Transitioning away from the US Dollar may lead to economic fluctuations and challenges, especially during the initial phase

3) Challenges for developing countries

4) These countries might face difficulties in international trade, if their local currencies lack global acceptance or stability

Working of De-dollarization

1) Country actively reducing its reliance on the US Dollar

2) This involves minimising the use of US Dollar in international transactions and decreasing the dollar reserves

Who benefits due to De-dollarization

The beneficiaries of a weaker US dollar include

1) Economic rivals – nations like China and those in the Eurozone can benefit, as their exports become relatively cheaper and more competitive

2) US exporters – American companies that export goods and services can offer more competitive prices, enhancing their position in the global market

Reasons for the downfall of US Dollar

1) The country is at danger from changes in value of US Dollar

2) Shifts in US monetary policy

3) US government has been running significant budget deficits

4) US government worries about inflation and dollars value

5) In recent years, the US has taken part in a number of geopolitical conflicts, such as war in Iraq and Afghanistan

6) Some nations are now less inclined to utilise the dollar asa result of these disagreements, which have raised tensions between US and other nations

7) China is having growing impact in international commerce

8) Cryptocurrencies, like Bitcoin, are a brand new type of digital money that is unregulated by the government

9) They are now appealing to those searching for a currency other than dollar as a result

India can take advantage of De-dollarization

1) Promoting the Indian Rupee

2) Expanding Regional trade and Cooperation

3) Currency Swap Agreements

4) Strengthening Financial Infrastructure

5) Diversifying Reserve Holdings

6) Encouraging Internationalization of Indian Companies

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