Why Dollar’s Losing Its Shine

Source: The post is based on the article “Why Dollar’s Losing Its Shine” published in The Times of India on 25^th April 2023.

Syllabus: GS 3 – Economy – Money and Banking

Relevance: measures taken adopt alternatives to dollar dominance

News: Countries around the world are looking for an alternative to the weakening US dollar.

What are the alternatives being adopted?

Central banks of most countries are now buying gold as an alternative to dollars. As per the estimate, gold currently accounts for a record 33% of monthly global demand.

This buying boom has helped push the price of gold to near record levels, more than 50% higher than what predicted by models based on real interest rates.

Moreover, countries like Russia, China, Brazil and India are also looking for a new currency to challenge the dollar. Their goal is to trade with one another directly, in their own coin.

Why are these countries looking for alternatives to dollars for trading?

Global trade has been based on the dollar since the end of World War II. However, the US has used its dollar dominance against countries to put financial sanctions.

As per the report, 30% of all countries now face sanctions from the US, the EU, Japan and the UK, which has gone up from 10% in the early 1990s.

The recent one is sanctions against Russia for its invasion of Ukraine. This cuts off Russian banks from the dollar-based global payment system.

This implied that in future any developing nation could be a target.

What are other measures being taken to promote non-dollar-based trading?

The Philippines and Thailand are now looking to non-dollar-based trading. India has also been discussing with the UAE the idea of conducting non-oil trade in rupees.

Further, dollar as forex reserves has also seen decline since the launch of Russia sanctions. As per the report, the dollar share of central bank reserves is down to 47% from 73% two decades ago.

Further, there are many central banks that are looking to launch their own digital currency. The number has tripled since 2020, representing 95% of the world’s gross domestic product.

Many are testing these digital currencies for use in bilateral trade which again is a challenge to dollars.

What does this imply for the US?

The shift from the dollar to other forms of currencies in trade increases risk for America.

This is because a dominant dollar matters for the US economy as high demand for the currency tends to lower the cost of borrowing abroad, which is a privilege for America.

Moreover, among the top 20 developed economies, America now has the second highest fiscal and current account deficits. Further, the country’s ability to pay its debts is also slipping, as its reliance on foreign funding keeps growing.

Hence, the shift from the dollar towards other currencies will affect overall America’s economy.