Is The World Seeing A Trend Of De-Dollarization In The Global Economy?

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According to medium.com: There is a new fad for ‘De-Dollarization’ across the global south. This fad has been exasperated by ‘Russia-Ukraine’ war since there is a narrative going around in the global south that US/western Europe is responsible for Ukraine crisis and Russia is a victim of western hegemony. There are also plenty of agreements signed between Russia and other countries to trade with currencies other than dollars. There is also a narrative that since China de-coupled USA to become world factory, it can also successfully do the same with dollars by overthrowing it.

There have been many attempts from many nations to move away from the dollar. Ask Gaddafi and Saddam on how it ended for them 🙂

Seriously- I find this de-dollarizing more of a political showmanship rather than a move rooted in any economics.

Put simply, it works like this: Global trade happens in a currency which investors feel safe and trust. That feeling of safety and trust comes from an assurance that your money would be protected when you exchange goods and services. That assurance is backed by a guarantee that comes from an institutional backing. That institution is the American Government.

It all comes down to This.One.Factor 👇

If I- as an investor want to trade in an alternate currency- like Yuan/ Ruble/ Rupee/ Riyal/ Euro- I would need to be assured that the money I put in reaches safely to the intended place. If any of these governments can provide that security/ guarantee, I would shift to that government backed currency.

Lets look at the evolution of the US Dollar and why its strong.

In summary it works like this:

  • In early 20th century, the economy of US surpasses the economy of British Empire.
  • After the World War, the USD replaced the GBP as the global reserve currency.
  • In 1933- the US Dollar deviated from gold standard and de-pegged its currency from gold.
  • In 1944, the Bretton Woods Agreement institutionalizes US Dollar as the world’s currency.
  • 1971- the Bretton Woods agreement dissolves.

It took more than a half a century, two World Wars, a Great Depression, weakening of the largest Empire and change of guard to move from GBP to USD.

Lets say we want to move away from US Dollar to a more trustworthy currency. For any alternative currency to be a reserve currency, these are the 5 factors

  • Domestic Economic Size (GDP).
  • Openness to financial markets
  • Importance of that economy to international trade’
  • Macro economic policies
  • Currency convertibility

If I want to move away from the US Dollar. What are my options?.

The next largest economy to the US of A is China. It has a sizable domestic economy [comparable with USA], its very important to international trade and it has got solid macro economic fundamentals. So far so good

It does not have an open financial market, nor can Yuan be converted to any other currency or tagged to a basket of common currencies.

What about Riyal?. Too small in economic size.

What about ruble?. Same story.

What about rupee?. Same story.

The above table is not exactly objective, but gives an idea of how currencies are perceived. USD has a red in Current account deficit and China has a surplus. China has a higher growth potential and national savings in green.

However, Chinese Yuan is not trusted well by investors because of its poor convertibility, rule of law and political stability.

The closest that can come to replacing the USD is Euro. It scores high on convertibility, credit, open financial markets and political stability- the key factors investors look in, which is reflected in the below graphs. Chinese Yuan is crying at 1.1% of total reserves :).

The way I see it- de-dollarization is more gas than actual substance as of January 2024. Its borne out of a frustration against the “aMeRICan hEGeMonY” rather than a real lack of trust in the American institutions.

Many people underestimate the US and that itself is a major strength of the US.

US Government is lot more trusted by an investor to put his money in over any of the currency baskets. It would be like this for a significant part of our lifetimes.

Unless US [and the rest of the world] goes through a repeat of what happened in the early 20th century, I see no change in the status quo.

Additional- Why are countries seeking to de-dollarize?

Economic, Geopolitical, and strategic constraints have forced other countries to de-dollarize, some of the factors are:

  • Currency war: Countries in Europe are actively pursuing de-dollarization. The main objective is to establish the dominance of their currency, the euro. If successful, it would lead to establishing euro hegemony against dollar hegemony.
  • Weaponization of USD: It refers to the American government’s exploitation of the currency’s global dominance to extend the extraterritorial reach of US law and policy.
  • Stability of dollars: The debt-to-GDP ratio of the USA has reached 130% as of 2023 and experts say that it will rise to 145% by 2027. Many countries are losing trust in the US dollar due to its high debt-to-GDP ratio and high inflation.
  • Russia-Ukraine war: After Feb-2022 when Russia declared war on Ukraine, multiple Western countries-imposed sanctions on Russia. As a consequence, countries that were dependent on Russia for trade and commerce agreed to use different currencies for trading to avoid sanctions.

What are the other alternatives countries are looking for?

Countries that were dependent on Russia for trade and commerce now seek to trade with different currencies to avoid sanctions from the US:

  • The volume of trade in yuan between China and Russia spiked after the start of the Ukrainian war. Russia’s economy has been badly affected by the sanctions — some Russian banks have been banned from SWIFT, If there’s one country at the forefront of using the Chinese yuan for its transactions, it’s Russia.

Despite these movements, few expect to see the end of the dollar’s global sovereign status anytime soon.

Conclusion- It would be difficult for the yuan or any other currency to beat the U.S. dollar and become the global currency.

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