Why ‘de-dollarisation’ is imminent?

ForumIAS announcing GS Foundation Program for UPSC CSE 2025-26 from 10th August. Click Here for more information.

News: The ongoing Russia-Ukraine crisis has given an impetus to the question of de-dollarisation of the global forex framework.

Efforts are already underway for the possible introduction of a new Russia-China payment system, bypassing SWIFT and combining the Russian SPFS (System for Transfer of Financial Messages) with the Chinese CIPS (Cross-Border Interbank Payment System). 

What is “de-dollarisation? 

It refers to the changes in the overall global forex market framework where the leading central banks would diversify their reserves away from US Dollar to other assets or currencies like the Euro, Renminbi or gold. 

How this hegemony of dollar was established? 

The US sealed a deal with the oil-rich Kingdom of Saudi Arabia in the 1970s to conduct global energy trade in dollars.  

The collapse of the Bretton Woods system in the 1970s: It enhanced the status of US Dollar by eliminating other developed market currencies from competing with the USD. 

Why “de-dollarisation” by central banks is imminent?  

To insulate the economies from geopolitical risks. US dollar as a reserve currency can be used as an offensive weapon, leading to potential foreign policy coercion or sudden disruptions. For example, the war in Ukraine and the subsequent economic sanctions can trigger central banks to proceed in this direction.  

The multipolar world requires each country to enjoy economic autonomy in the sphere of monetary policy.   

2008 global financial crisis exposed underlying cracks within the US economy and challenged the western hegemony of the financial system.  

Rise of Asian economies: As major economic powers like China and India rise, the importance of other currencies like the Yuan and the Indian rupee is going to increase   

What are Russian and Chinese efforts towards de-dollarisation?  

Russia: It started three-pronged efforts towards de-dollarisation in 2014 (after annexation of Crimea).  

– First, Russia reduced its share of dollar-denominated assets.  

– Second, it prioritises national currencies (instead of US Dollar) in bilateral trade.  

– Third, Russia developed a national electronic payments system called “Mir” in 2015.   

China: China aims to use trading platforms and its digital currency to promote de-dollarisation. It has established RMB trading centres in Hong Kong, Singapore and Europe.  

In 2021, the People’s Bank of China submitted a “Global Sovereign Digital Currency Governance” proposal at the Bank for International Settlements (BIS) to influence global financial rules via its digital currency, the e-Yuan.  

The IMF has already added Yuan to its SDR (Special Drawing Rights) basket in 2016.  

In 2017, the European Central Bank exchanged EUR 500 million worth of its forex reserves into Yuan-denominated securities.   

What are the challenges that de-dollarisation faces?  

US Dollar share in the global trade and foreign exchange: Currently, about 60% of foreign exchange reserves of central banks and about 70% of global trade is conducted using USD.   

Psychological Angle: The USD is considered as a “safe-haven” asset i.e., the people continue to view the currency as a relatively risk-free asset. Therefore, the world will continue to prefer the USD as a “store of value” and a “medium of exchange”, fulfilling the basic functions of money.  

Side effects of de-dollarisation: Sudden dumping of dollar assets by adversarial central banks, may give rise to balance sheet risks as it will erode the value of their overall dollar-denominated holdings.  

Most other foreign currencies (Apart from the Euro and gold) have some inherent risks associated with them.   

What is the way forward? 

Thus, despite triggers to the move away from the dollar, in reality, it will be a protracted process.  

Source: The post is based on an article “Why ‘de-dollarization’ is imminent?” published in the Indian Express on 17th Mar 22

Print Friendly and PDF
Blog
Academy
Community