{"id":174782,"date":"2022-03-17T20:20:02","date_gmt":"2022-03-17T14:50:02","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=174782"},"modified":"2022-03-17T20:20:02","modified_gmt":"2022-03-17T14:50:02","slug":"why-de-dollarisation-is-imminent","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/why-de-dollarisation-is-imminent\/","title":{"rendered":"Why \u2018de-dollarisation\u2019 is imminent?"},"content":{"rendered":"\n

News<\/strong>: The ongoing Russia-Ukraine crisis has given an impetus to the question of de-dollarisation of the global forex framework.<\/span><\/p>\n

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).<\/span>\u00a0<\/span><\/p>\n

What is \u201cde-dollarisation?<\/span><\/b>\u00a0<\/span><\/h5>\n

It refers to the changes in the <\/span>overall global forex market framework <\/span><\/b>where the leading central banks would diversify their reserves away from US Dollar to other assets or currencies like the Euro, Renminbi or gold.<\/span>\u00a0<\/span><\/p>\n

How this hegemony of dollar was established?<\/span><\/b>\u00a0<\/span><\/p>\n

The US sealed a deal with the oil-rich Kingdom of Saudi Arabia in the 1970s to conduct global energy trade in dollars. <\/span>\u00a0<\/span><\/p>\n

The collapse of the Bretton Woods system in the 1970s<\/span><\/b>: It enhanced the status of US Dollar by eliminating other developed market currencies from competing with the USD.<\/span>\u00a0<\/span><\/p>\n

Why \u201cde-dollarisation\u201d by central banks is imminent?<\/span><\/b>\u00a0<\/span>\u00a0<\/span><\/h5>\n

To <\/span>insulate the economies from geopolitical risk<\/span><\/b>s. US dollar as a reserve currency can be used as an offensive weapon, leading to potential foreign policy coercion or sudden disruptions. <\/span>For example<\/span><\/b>, the war in\u202fUkraine\u202fand the subsequent economic sanctions can trigger central banks to proceed in this direction.<\/span>\u00a0<\/span>\u00a0<\/span><\/p>\n

The multipolar world requires each country to enjoy economic autonomy in the sphere of monetary policy.\u00a0<\/span>\u00a0<\/span>\u00a0<\/span><\/p>\n

2008 global financial crisis <\/span><\/b>exposed underlying cracks within the US economy and challenged the western hegemony of the financial system.<\/span>\u00a0<\/span>\u00a0<\/span><\/p>\n

Rise of Asian economies<\/span><\/b>: 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\u00a0<\/span>\u00a0<\/span>\u00a0<\/span><\/p>\n

What are Russian and Chinese efforts towards de-dollarisation?<\/span><\/b>\u00a0<\/span>\u00a0<\/span><\/h5>\n

Russia: <\/span><\/b>It started <\/span>three-pronged<\/span><\/b> efforts towards <\/span>de-dollarisation <\/span><\/b>in 2014 (after annexation of Crimea). <\/span>\u00a0<\/span><\/p>\n

– First<\/span><\/b>, Russia reduced its share of dollar-denominated assets. <\/span>\u00a0<\/span><\/p>\n

– Second<\/span><\/b>, it prioritises national currencies (instead of US Dollar) in bilateral trade. <\/span>\u00a0<\/span><\/p>\n

– Third<\/span><\/b>, Russia developed a national electronic payments system called \u201cMir\u201d in 2015.\u00a0<\/span>\u00a0<\/span>\u00a0<\/span><\/p>\n

China: <\/span><\/b>China aims to use trading platforms and its digital currency to promote de-dollarisation. It\u00a0has established<\/span> RMB trading centres<\/span><\/b> in Hong Kong, Singapore and Europe. <\/span>\u00a0<\/span><\/p>\n

–<\/span><\/b> In 2021, the People\u2019s Bank of China submitted a \u201c<\/span>Global Sovereign Digital Currency Governance<\/span><\/b>\u201d proposal at the Bank for International Settlements (BIS) to influence global financial rules via its digital currency, the e-Yuan. <\/span>\u00a0<\/span><\/p>\n

–<\/span><\/b> The <\/span>IMF<\/span><\/b> has already added Yuan to its SDR (Special Drawing Rights) basket in 2016. <\/span>\u00a0<\/span><\/p>\n

–<\/span><\/b> In 2017, the European Central Bank exchanged EUR 500 million worth of its forex reserves into Yuan-denominated securities.\u00a0<\/span>\u00a0<\/span>\u00a0<\/span><\/p>\n

What are the challenges that de-dollarisation faces?<\/span><\/b>\u00a0<\/span>\u00a0<\/span><\/h5>\n

US Dollar share in the global trade and foreign exchange<\/span><\/b>: Currently, about 60% of foreign exchange reserves of central banks and about 70% of global trade is conducted using USD.\u00a0<\/span>\u00a0<\/span>\u00a0<\/span><\/p>\n

Psychological Angle<\/span><\/b>: The USD is considered as a \u201csafe-haven\u201d 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 \u201cstore of value\u201d and a \u201cmedium of exchange\u201d, fulfilling the basic functions of money.\u00a0<\/span>\u00a0<\/span><\/p>\n

Side effects of de-dollarisation<\/span><\/b>: Sudden dumping of dollar assets by adversarial central banks, may give rise to\u00a0balance sheet risks as it will erode the value of their overall dollar-denominated holdings.<\/span>\u00a0<\/span>\u00a0<\/span><\/p>\n

Most other foreign currencies (Apart from the Euro and gold) have some inherent risks associated with them.\u00a0<\/span>\u00a0<\/span>\u00a0<\/span><\/p>\n

What is the way forward?<\/span><\/b>\u00a0<\/span><\/h5>\n

Thus, despite triggers to the move away from the dollar, in reality, it will be a protracted process.\u00a0<\/span>\u00a0<\/span><\/p>\n

Source<\/strong>: The post is based on an article \u201cWhy \u2018de-dollarization\u2019 is imminent?<\/strong>\u201d published in the Indian Express<\/strong> on 17<\/strong><\/span><\/span>th<\/span><\/span> Mar 22<\/span><\/span><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

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).\u00a0 What… Continue reading Why \u2018de-dollarisation\u2019 is imminent?<\/span><\/a><\/p>\n","protected":false},"author":10328,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[216,10500],"class_list":["post-174782","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-gs-paper-3","tag-indian-express","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/174782","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10328"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=174782"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/174782\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=174782"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=174782"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=174782"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}