DE-dollarization refers to the replacement of the US dollar with other currencies as the world’s reserve currency.
A reserve currency refers to any currency widely used in cross-border transactions and usually held as reserves by central banks. Countries have been trying to dethrone the dollar as the world’s reserve currency for many decades now for a variety of reasons. But lately, attempts to de-dollarize have accelerated following the Russian invasion of Ukraine last year. The United States imposed several sanctions that restricted the use of the US dollar to purchase oil and other goods from Russia, and this was seen by many countries as an attempt to weaponize the dollar. Since international transactions made in US dollars are cleared through US banks, this gives the US government significant power to oversee and control these transactions. Currently, the Chinese Yuan is considered the main alternative to the US Dollar due to China’s rising economic power.
The advantage of reserve currency
Other currencies such as the pound sterling and the French franc have served as international reserve currencies in the past. It should be noted that it was the currencies of the economic superpowers that generally ended up being used as the world’s reserve currency. As the economic weight of these countries declined, their currencies faced a similar fall. This was the case, for example, of the British pound which was gradually replaced by the US dollar when Great Britain lost its status as the world’s economic superpower in the first half of the 20th century.
Critics of the US dollar believe that its status as the world’s reserve currency gives it unfair privileges over other countries, thereby justifying attempts by many countries to de-dollarize. It should be noted that when a country’s fiat currency is granted reserve currency status, it gives the country the power to purchase goods and other assets from the rest of the world by simply creating new currency from Nothing. However, such irresponsible expansion of the money supply can cause the currency to depreciate and possibly threaten its status as a reserve currency.
Others point to the expansionary monetary policy adopted by the US Federal Reserve over the decades to argue that it could threaten the status of the US dollar as the world’s reserve currency. The U.S. central bank typically increases the supply of dollars through various means to deal with economic downturns and also to fund U.S. government spending. But it should be noted that the US Federal Reserve is not the only central bank in the world to depreciate its currency by pursuing an expansionary monetary policy for several decades. Other countries have also increased their respective money supply to solve their national economic problems. As long as the United States does not depreciate its currency at a faster rate than other countries, the dollar may successfully maintain its value against other currencies and therefore its status as a reserve currency may not not be seriously threatened.
The popularity of the US dollar
Many economists argue that the US dollar is not taxed on anyone to be accepted as a medium of exchange for cross-border transactions. They note that the US dollar is widely used in international transactions because people actually prefer to use US currency over others for various economic reasons. Other currencies that have tried to compete with the US dollar are not as popular as the greenback for international transactions. For example, a recent attempt by India and Russia to conduct trade between the two countries in Indian rupees rather than US dollars hit a snag, as the value of India’s imports from Russia far exceeds its exports to the country. This left Russia with excess rupees on hand which it was unwilling to spend on Indian goods or assets, and led to Russian demands for bilateral trade settlement in US dollars. So even Russia, a longtime friend of India and a longtime enemy of the United States, preferred to trade with India in US dollars, as the dollar is far more widely acceptable than the Indian rupee.
The global acceptability of the US dollar has mainly been attributed to the popularity of US assets with investors. It should be noted that the United States has had a persistent trade deficit for decades (in fact, the last time the United States had a trade surplus was in 1975). That is to say that the value of its imports has for a long time exceeded the value of its exports to the rest of the world. The excess dollars that the rest of the world accumulates due to the US trade deficit have been invested in US assets such as debt securities issued by the US government. The high level of confidence that global investors have in US financial markets, possibly due to the “rule of law” in the United States, is considered to be one of the main reasons why investors prefer to invest in assets. Americans. It should be noted, however, that a country does not have to be in deficit for its currency to be accepted as a reserve currency.
China, for example, which supplies the world with huge volumes of goods and has a trade surplus, has tried to make the yuan a reserve currency. However, restrictions imposed by the Chinese government on foreigners’ access to Chinese financial markets and doubts about the “rule of law” in China have hurt global demand for the yuan.
