De-Dollarization and the Rippling economic effects

Introduction.

For decades the dollar has been the cornerstone of the global economy, the primary currency for trade and investments. This dominance has significantly provided leverage to the US economy and its network in the global markets. As most countries trade in dollars the necessity to maintain better relations between the US and the countries becomes burdensome on other countries and poses fear of getting sanctioned has led to the fall of the dollar and its dominance. Though the de- dollarization is still a big dream for many countries afraid to take this step, many International Organizations have taken their step towards this initiative for example Brazil, Russia, India, China, and South Africa (BRICS) . Furthermore, we will study the the fading of dollar dominance and the consequences of the de-dollarization which the other countries are being threatened by the US prime minister.

What is De-Dollarization?

De-dollarization is the process of reducing the dominance of the greenback in world trade and transactions. This involves creating alternative global financial and technological mechanisms similar to The Society for Worldwide Interbank Financial Telecommunication (Swift). This urge to shift from the dollar to an alternative financial system and payment mechanisms emerged because of various geopolitical and economic conditions of various countries. The ultimate goal of de-dollarization is to establish a more diversified and balanced global financial system that is less influenced by the economic policies of the United States and also its political decisions.

Why are Nations switching to De-dollarization or non-dollar payment systems?

Fear of sanctions and SWIFT controlled by the U.S.

Sanctions: weapon of the U.S. government, the dominance of the dollar is so strong that it allows the U.S. to impose sanctions by restricting access of those countries from the global financial system i.e. (SWIFT) The Society for Worldwide Interbank Financial Telecommunication. Russia's annexation of Crimea in 2014 and also the invasion of Ukraine have led to a lot of pressure from the U.S. and its allied nations to impose sanctions which includes freezing Russian assets and cutting off Russian banks from the SWIFT system. Similarly, Iran was also removed from SWIFT due to sanctions from the U.S. over its nuclear program. Venezuela too had been a victim of these sanctions from the U.S. over its oil exports and transactions which shows how U.S. sanctions have ruined many nation's access to global trade. This shows even though the SWIFT system is claimed to be neutral yet it is heavily influenced by the western powers.

The U.S. Dollar is not backed by Gold.

After World War II the 44 allied nations had a meeting in Bretton Woods to establish a new global financial system which is called Bretton Woods Agreement. This created fixed exchange rates where countries pegged their currencies to the U.S. dollar which was in turn pegged into gold at $35 per ounce.

Soon after the Bretton Woods collapsed, marking the end of dollar-to-gold convertibility and the dollar faced severe consequences,such as the Vietnam war led to several doubts about whether the U.S. had enough gold to back the dollar circulation. In response the then President Richard Nixon in August 1971 announced suspension of Dollar's convertibility to gold which led to the beginning of fiat currency system.

Impact of U.S. inflations globally

In International trade, commodities like oil and gas are traded in U.S. dollars. Inflation caused in the U.S. during COVID-19. The U.S. government was forced to print more money to combat the issue, which led to dollar depreciation. When other countries purchase dollars, the value of their currency fluctuates. Any changes in the U.S. economy cause ripple effects to other countries, which leads to inflation across the globe.

Fading of Dollar's Dominance.

The dollar's share of global reserves has declined over the past 20 years, for instance China is buying more gold. Inflation is causing dollar depreciation and instability in the fiscal deficit and debt levels. The dollar's share of foreign exchange fell from 65% in 2016 to 59% in 2023 whereas it was at an all time high in 2002 over 72%. even during the 2008 great recession the U.S. dollar still managed to appreciate against six other major currencies by 26%.

The latest IMF's Currency Composition of Official Foreign Exchange Reserves (COFER) survey results show that total foreign exchange reserves declined slightly to 12.35 trillion USD in 2024Q2 from 12.38 trillion USD in 2024Q1, largely reflecting lower US-dollar-denominated holdings.

Global Reserves Decrease Slightly as US Dollar Loses Some Ground

Countries Moving Towards De-Dollarization.

China:

China has a motive to make renminbi (RMB) a global currency. by reducing dependency on the dollar and promoting the Chinese yuan(renminbi) i.e. easing of capital control and promoting the yuan liquidity by currency swaps. Countries like Hong Kong, Singapore, and Taiwan have RMB deposits. China has signed an agreement with 20 foreign central banks to provide yuan liquidity. According to reports China's 18% of trade was settled in RMB by the end of 2013.

Another initiative taken by China in the launching of (CIPS) Cross-Border Interbank Payment System in 2015 which works as an alternative to SWIFT where the transactions would be based on yuan(renminbi) instead of dollar. CIPS has Chinese and international shareholders and among them the People's Bank of China is the largest shareholder holding equity of 16%, Foreign shareholders such as HSBC, Standard Chartered, Bank of East Asia, Citigroup and BNP Paribas.

Russia:

Russia launched an alternative to SWIFT which is (the SFPS) System for Transfer of Financial Messages. This initiative was in response to the sanctions which were imposed on Russia after the Ukraine invasion. SFPS is promoted by Russia to foreign financial institutions, by the end of April 2022 almost 52 foreign organizations across 12 countries have gained access to SFPS, and this number was increased to 150 foreign organizations across 16 countries in 2024.

India-Russia ruble rupee trade: a payment mechanism which can allow Indian exporters to be paid in Indian rupees for their exports to Russia instead of standard international currencies such as dollars or euros. In 2023 the bilateral trade reached upto $65billion with importing Russian oil. Sberbank, Russia's largest bank, manages payments for up to 70% of Russia's exports to India.

BRICS:

New Development Bank (NDB): Shanghai-based bank focusing on BRICS currencies, such as South African, Brazilian, and Indian currencies. The bank was established by the BRICS group, which includes Brazil, Russia, India, China, and South Africa. Launched in 2015, it was created to provide an alternative to financial institutions dominated by the West and has disbursed $33 billion for various development initiatives.

Trump’s Trade policies:

Sanctions on Russia in 2014 due to the annexation of Crimea and pressurization of Russian business banks. Sanctions are being imposed on Venezuela and Iran.

President Trump announced on Thursday that the United States would withdraw from the Paris climate accord, weakening efforts to combat global warming and embracing isolationist voices in his White House who argued that the agreement was a pernicious threat to the economy.

Trump’s “America First” policy emphasized prioritising the U.S. interests in international trade, a key weapon in this was the use of tariffs as a strategic tool.

For example, in 2020, the U.S. imposed tariffs on over $360 billion worth of Chinese goods, targeting a wide range of products. Additional tariffs were imposed on steel and other goods, leading to disputes over subsidies with allies such as the European Union, Canada, and Mexico, even developing nations such as Brazil and India faced tariffs, on specific goods like agricultural products.

The recent news on the tariff and its wrong usage by President-elect Donald has threatened a 100% tariff on imports from BRICS nations if they continue actions perceived as undermining the U.S. dollar, signalling continued focus on aggressive trade policies to safeguard America’s economic interests.

Conclusion:

The dominance of the dollar was once considered as unable to be attacked, as we can see gradually this notion is changing as nations think of de-dollarization in order to secure their economic sovereignty. The dollar and its significance are because of the current geopolitical and economic conditions. Countries like Russia and China are acting as pioneering country.

As we can see the shift of de-dollarization is yet not completely accomplished. The path towards de-dollarization seems more tight and tough because of the dollar's dominance, the U.S. president has strategies to protect the global recognition and value of the U.S. dollar, also known as the greenback. These efforts are crucial in maintaining its status as the world’s primary reserve currency, which underpins international trade, investments, and financial stability.

Reference:

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