China
2023.04.05 01:15 GMT+8

Explaining De-dollarization

Updated 2023.04.05 01:15 GMT+8
Omar Elwafaii

The U.S. dollar has long reigned as the dominant global currency, playing a pivotal role in trade and capital flows. However, with an increasing number of nations seeking alternatives to reduce their dependence on the United States, the era of dollar dominance may be facing significant challenges.

The U.S. emerged as a leading financial power almost overnight after World War I. With its European counterparts weakened, the dollar began to displace the pound sterling as the international reserve currency.

The U.S. also saw a significant inflow of wartime gold, further solidifying its financial dominance. The dollar's role was further cemented in 1944 with the Bretton Woods Agreement, which pegged the U.S. dollar to gold and established a collective international currency exchange regime. However, the dollar's purchasing power has been gradually eroding since President Nixon ended its direct convertibility to gold in 1971.

Fearing America's dominance over the global financial system and its potential for weaponization, nations such as Russia and China have been exploring alternatives to reduce the dollar's hegemony. As Western nations imposed economic sanctions on Russia following its special military operation in Ukraine, Moscow, and Beijing have cooperated to establish financial independence from the U.S. dollar.

Since 2022, ruble-yuan trade has increased eighty-fold, and Russia and Iran are reportedly collaborating on a gold-backed cryptocurrency. Furthermore, central banks, particularly those in Russia and China, have accelerated their gold purchases to diversify reserves away from the dollar.

De-dollarization is also gaining traction in other parts of the world. Brazil and Argentina have considered creating a common currency for South America's two largest economies. Former Southeast Asian officials discussed de-dollarization efforts at a conference in Singapore in January. The United Arab Emirates and India are negotiating a shift away from the dollar, using rupees to trade non-oil commodities, according to Reuters. and most importantly, for the first time in 48 years, Saudi Arabia has indicated its openness to trading in currencies other than the U.S. dollar.

Despite the growing push for de-dollarization, the U.S. dollar's global sovereign status is unlikely to end soon. Central banks still hold approximately 60% of their foreign exchange reserves in dollars. However, the ongoing efforts by various nations to explore alternatives and reduce their dependence on the U.S. financial system signal a potential shift in the global economic landscape. 

As more countries join the de-dollarization movement, the future of the U.S. dollar's dominance remains uncertain.

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