The de-dollarisation debate

Source: The post is based on the article “The de-dollarisation debate” published in the Business Standard on 2nd 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?

While the US accounts for about 25% of the global gross domestic product (GDP), its true economic power is driven by global dependence on the USD. For example,

a) The USD accounts for approximately 90% of all Forex transactions. That means that the dollar was on one side or the other in nine out of 10 global foreign exchange transactions, b) The dollar also accounts for 85 per cent of all currency forward and swap markets, c) Almost half of all cross-border loans and international debt securities are also denominated in USD. This is despite the fact that non-US entities are the borrower/issuer in 88% of all international debt issuance, d) The dollar is also used for about 50% of all trade invoicing despite the US only accounting for about 12% of global trade and e) The USD comprise 60% of global Forex reserves.

Note: Most central banks do not have more than 10% of gold in their Forex mix (except Russia and Turkey). This is because it provides no yield, and if all major central banks tried to boost their gold holdings, it would have a serious price impact. 

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: The top 20 countries ranked by quantum of Forex reserves, except for China/Hong Kong, the rest are political allies of the US or have some form of cooperation. Hence, the only countries that may try to move away from the USD would be China, HK and Saudi Arabia. 

Of these, HK and Saudi Arabia run a USD peg of their own currencies, and thus cannot move away from dollar easily.

Hence, the USD is unlikely to lose the reserve currency status.