De-dollarisation: Will the greenback still be green?

Source: The post is based on the article “Will the greenback still be green?” published in The Hindu on 8th 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: As China, India, and Russia trying to trade using partner currencies for payment instead of the U.S. dollar, various media are also speculating that the demise of the dollar as world reserve 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?

How dominant is US Dollar in global trade?

China itself has substantial U.S. dollar reserves earned from its trade with the U.S. over the past three decades. China has used these dollar reserves to fund its strategic investments abroad.

The benefit of dollar premium: Being a supplier of international reserve currency confers a distinct advantage to the U.S. Such as, the US has the ability to borrow at a low interest rate.

This a) relaxes the fiscal constraint substantially, b) boosts the debt ­issuing government’s capacity to borrow more without having to deal with the negative effects of such borrowing on the domestic economy.

This phenomenon is often referred to as the dollar premium

About the present share of Forex reserves in the world

According to reports from the International Monetary Fund, the dollar’s share of foreign exchange reserves has fallen over time from 80% in the 1970s to about 60% in 2022. The euro has made up for about 20% of the remaining 40%.

Other currencies such as the Chinese Yuan, Australian and Canadian dollars, Swedish krona, and South Korean won have claimed their share in the portfolios of various countries’ foreign exchange reserves making up most of the remaining gap of 20%.

Note: China runs a closed capital account. So, it still does not feature as a prominent choice as reserves. Most of the Renminbi reserves that are held outside China are by Russia. 

What are the negative impacts of de-dollarisation?

Can the Chinese Yuan replace the US Dollar?

Why does India hold US Dollar as Forex reserves and not the Russian Ruble?

This is because a) Even though, India’s biggest supplier of oil is Russia, India’s biggest trading partner is still the U.S., b) Russia’s importance as an oil supplier is a result of the deep discounts offered by its oil suppliers to Indian refiners. Such discounts will not be sustainable in the long run.

This creates doubt on the long-term viability of a common currency or a reciprocal trading arrangement between India and Russia.