De-dollarisation: the race to attain the status of global reserve currency

Source: The post is based on the article “De-dollarisation: the race to attain the status of global reserve currency” published in The Hindu on 3rd May 2023

Syllabus: GS 3 – Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Relevance: About the de-dollarisation debate.

News: There are evidences that countries are trying to break away from the USD through de-dollarisation.

How dominant is US Dollar in global trade?

The majority of international transactions are carried out in the U.S. dollar. These transactions are cleared by American banks, which gives the U.S. government significant power to oversee and control these transactions.

Since USD is a fiat currency of the US which enjoys reserve currency status, it gives the US the power to purchase goods and other assets from the rest of the world by simply creating fresh currency.

What is de-dollarisation, what are the global efforts towards the De-dollarisation of trade, and How is India pursuing the de-dollarisation of trade?

What are the negative impacts of de-dollarisation?

Not easy to de-dollarise: Other currencies that tried to compete against the U.S. dollar are not popular and face challenges in carrying out international transactions.

For example, the recent attempt by India and Russia to carry out trade between the two countries in Indian rupees rather than in U.S. dollars has hit a roadblock. This is because the value of India’s imports from Russia far outweighs its exports to the country.

This left Russia with excess rupees in hand. But with that rupee, Russia was unwilling to spend on Indian goods or assets. So, now Russian demands for the settlement of bilateral trade in U.S. dollars. Instead of rupee.

Can the Chinese Yuan replace the US Dollar?

The U.S. has been running a persistent trade deficit for decades now. The excess dollars that other countries accumulate due to the U.S.’s trade deficit has been invested back in U.S. assets such as in debt securities issued by the US government.

The major reason for such investment is due to a) The high level of trust among global investors in the U.S. financial markets, and b) the ‘rule of law’ in the U.S.

Note: The last time the U.S. ran a trade surplus was way back in 1975.

Currently, the Chinese yuan is seen as the primary alternative to the USD owing to China’s rising economic power. However, restrictions placed by the Chinese government on foreign access to China’s financial markets and doubts over the ‘rule of law’ in China have adversely affected global demand for the yuan.