The Dollar’s Dominance

The United States essentially suddenly surpassed other financial superpowers after World War I. The nation outperformed its European opponents despite only joining the war in 1917 in terms of strength.

As a result, during the war, the United States began to import a considerable quantity of gold and the dollar began to supplant the pound sterling as the world’s reserve currency.

By the late 1960s, Japanese and European exports were beginning to compete more favorably with American exports. Given that there was a ready supply of dollars everywhere, it was difficult to back them with gold. President Nixon halted the practice of exchanging US currency directly for gold in 1971. The gold standard and the ban on money production were therefore both removed.

Despite continuing to function as the world’s reserve currency since then, the value of the dollar has progressively declined.

De-dollarization initiatives by China and Russia

Other countries have been searching for alternatives to the dollar’s hegemony due to American supremacy over the global financial system and the country’s capacity to “weaponize” it.

Trade between the ruble and the yuan has multiplied eighty times since the invasion in 2022. According to the Russian news outlet Vedmosti, Iran and Russia are also collaborating to introduce a cryptocurrency backed by gold.

The governments of Moscow and Beijing worked together to reduce their reliance on the dollar and to promote cooperation between their different financial systems after the United States and other Western countries imposed economic sanctions against Russia in punishment for its invasion of Ukraine.

As nations strive to diversify their reserves away from the dollar, central banks have also purchased gold at the quickest rate since 1967, particularly those of China and Russia.

How Other Nations Are Reducing Their Dependence on the Dollar

De-dollarization It’s a common subject elsewhere in the world:

• The two biggest economies in South America, Brazil and Argentina, have recently debated the idea of creating a single currency.
• Several former Southeast Asian officials discussed ongoing de-dollarization initiatives at a meeting in Singapore in January.
• According to Reuters, the UAE and India are in talks to switch from trading non-oil commodities in dollars to doing so in rupees.
• Saudi Arabia, in 48 years, for the first time has declared its willingness to trade in currencies other than the US dollar. Despite the prevailing trends, the dollar is expected to lose its status in the coming days.

Southeast Asian countries are also abandoning the dollar

The use of the dollar is waning in Southeast Asian countries as well. On March 28 in Indonesia, the Association of Southeast Asian Nations (ASEAN) central bank governors and finance ministers convened.

As reported by the news source ASEAN Briefing, the main item on their agenda was “discussions to reduce dependence on the US Dollar, Euro, Yen, and British Pound from financial transactions and move to settlements in local currencies.”

Trade within the region could be carried out in local currencies with the aid of the cross-border digital payment system that ASEAN established. According to the ASEAN Briefing, this was decided by Indonesia, Malaysia, Singapore, the Philippines, and Thailand in November 2022.

The central bank of Indonesia, according to the media outlet, would build a regional payment system. Following the United States, Indonesia has the world’s fourth-largest population. Malaysia, a Southeast Asian country, is a vociferous supporter of DE dollarization.

The Prime Minister of Malaysia and the President of China met on 31 March 2023 in China to discuss initiatives both countries can take to reduce the dollar dominance in their country’s trade. The discussions even included a discussion for the creation of the Asian Monetary Fund as opposed to the International Monetary Fund (IMF). That is primarily controlled by the US.

Bloomberg cited Anwar as saying, “There is no reason for Malaysia to continue depending on the dollar.”

The news source claims that Malaysia’s central bank is putting up a payment system so that the Southeast Asian country can trade with China using the ringgit, its own currency.

Informal terminology for economic warfare is “economic statecraft.” The United States unilateral sanctions against countries around the world, that are blatantly in violation of international law, are having the exact opposite impact. In order to avoid being the next target, many nations are currently seeking for financial alternatives.

Additionally, the dollar has gained to the point where it is harming other currencies since the US Federal Reserve has been steadily raising interest rates.

Even the US’s partner India is hedging its de-dollarization bets

According to Reuters, India’s leading refiner Indian Oil Corp, and Russia’s largest oil producer Rosneft reached an agreement to utilize the Dubai pricing benchmark for oil sales rather than the Brent benchmark.

De-dollarization is supported by a number of African nations as well. Kenya and state-owned firms in Saudi Arabia and the United Arab Emirates struck a contract in March to buy oil on credit using the shilling, the indigenous currency of the nation. The request came from Kenya because the African country’s dollar reserves are depleting as a result of having to pay for increasingly expensive imports.

One of the most esteemed newspapers in the world, The Financial Times, claimed in an article from March that these historic shifts are a part of the transition to a “multipolar currency world.”

The Financial Times editorial board chair and US editor-at-large Gillian Tett claimed that the “US banking turmoil, inflation, and the impending debt ceiling battle is making dollar-based assets less attractive.”

She cited Jim O’Neill, a former economist at Goldman Sachs and the one who came up with the term “BRICS,” who asserted that “the dollar plays far too dominant a role in global finance.”

Is de-dollarization imminent?

Generally speaking, a small de-dollarization is predicted rather than a slow de-dollarization. According to Wise, this is particularly true in light of the substantial advantages that come with a currency that is widely used and the fact that the United States has long had a global network of alliances and partnerships.

Growingly plausible, especially in the context of geopolitical rivalry, is partial de-dollarization, in which non-aligned countries and China’s trading partners adopt the renminbi to replace some of the dollar’s current functions. Regionalism, which would create distinct economic and financial spheres of influence with unique currencies and markets as their main points, could eventually result from this.

Read: How India-Middle East-Europe Corridor will connect countries?

For many years to come, it is likely that the US and its currency will play a big role in world affairs, but the new system will not allow for hegemony, superpowers, or winner-takes-all tactics. Further, Republican Senator Marco Rubio recently expressed worry that the United States’ authority to apply sanctions on other nations may gradually erode.