De-Dollarization:- Enduring Dominance of the U.S. Dollar

Image Courtesy:- Elements 

Recent threat by Donald Trump to BRICS countries on accepting new BRICS currency and boycotting Dollar can face upto 100% tariff on boycotting Dollar; compelled the countries to be in the dollar limit and why De-dollarization can proved to be a such catastrophe to US economy and their global dominance? Let's see why dollar matters so much and how this became a talking currency.

De-dollarization, the process of reducing the dominance of the U.S. dollar in global trade and finance, has gained traction in recent years. Nations like China, Russia, and members of BRICS (Brazil, Russia, India, China, and South Africa) have actively pursued alternatives, ranging from bilateral trade in native currencies to introducing Central Bank Digital Currencies (CBDCs). Despite these efforts, the U.S. dollar retains its status as the world's primary reserve and trade currency. This article explores why de-dollarization could destabilize global trade, the lack of a viable alternative to the dollar, and how the dollar cemented its trust as a medium of exchange.

Why De-Dollarization Could Destabilize Global Trade? 

1. Fragmented Trade Systems: De-dollarization promotes reliance on multiple currencies. Without a universal medium like the dollar, trade becomes fragmented, complicating pricing, invoicing, and settlements. The use of diverse currencies increases transaction costs due to the need for constant currency conversions. For instance, the dollar currently dominates 88% of forex transactions.

2. Reduced Liquidity: The dollar’s deep liquidity stems from its wide usage. With nearly $6.6 trillion traded daily, the dollar enables efficient capital flow. Switching to less-liquid currencies risks impairing cross-border transactions and trade financing.

3. Geopolitical Risks: While de-dollarization can shield countries from U.S.-led sanctions, it introduces geopolitical complexities. Regional currencies like the yuan or ruble could further polarize global alliances, fostering trade blocs that may isolate smaller nations.

Challenges to Establishing a Dollar Alternative 

Despite de-dollarization efforts, no single currency meets the criteria of global trust, stability, and liquidity comparable to the dollar. Key challenges include:

1. Economic Power Disparity:  The U.S. economy, with a GDP exceeding $25 trillion, underpins the dollar’s strength. It accounts for only 10% of global trade but over 50% of trade invoicing and 60% of global reserves. In contrast, the euro represents just 20% of reserves, while China’s yuan is limited to 2%.

2. Lack of Infrastructure:  The dollar benefits from a robust financial system, including institutions like the Federal Reserve and the SWIFT network, which handles 90% of cross-border transactions. New initiatives, such as BRICS Pay or digital currencies, are still in their infancy.

3. Trust and Transparency:  Trust in the dollar stems from U.S. political stability and its commitment to monetary policies. Alternatives like the yuan face concerns over China's opaque regulatory framework, while currencies of smaller economies lack the necessary scale.

The Dollar’s Enduring Strength  

The dollar's prominence is rooted in history and structural advantages:  

1. The Bretton Woods System:  After World War II, the Bretton Woods Agreement pegged major currencies to the dollar, itself backed by gold. Although the gold standard ended in 1971, this established the dollar as a global anchor currency.

2. Oil and Commodities Trade:  The “petrodollar” system ensures oil and key commodities are traded in dollars, creating a continuous demand. For example, approximately 69% of global currency reserves are in dollars.

3. U.S. Bond Market:  The U.S. Treasury market is the largest and most liquid in the world. Investors prefer dollar-denominated debt due to its safety during crises, reinforcing the dollar’s role as a global store of value.

Image Courtesy:- IMF

Why De-Dollarization Is Slow Progress :- 

Efforts by countries like China and Russia include establishing currency swap agreements, using the yuan for bilateral trade, and promoting CBDCs for faster settlement. For example, BRICS countries have discussed creating a shared currency, and Russia conducts significant trade with China in yuan.

1.Limited Adoption:  Even within trade agreements, alternative currencies like the yuan or euro rarely replace the dollar. For instance, the dollar dominates debt issuance, and its use in global transactions exceeds any rival currency.

2. Complex Transitions: Transitioning to a de-dollarized world requires overcoming entrenched systems, from SWIFT dependency to U.S.-dollar-based central bank reserves. These changes demand global coordination, which is politically challenging.

How a BRICS Currency Could Challenge Dollar Dominance?

              FT(Proposed New BRICS Currency)

A unified BRICS currency—proposed by Brazil, Russia, India, China, and South Africa—could disrupt the U.S. dollar's global dominance. Rooted in the desire to reduce reliance on Western financial systems, such a currency aims to enhance trade within the BRICS bloc, which collectively accounts for over 40% of the global population and a quarter of the world's GDP.  

Key to its success would be its backing by tangible assets like gold or a basket of commodities, appealing to countries wary of inflation and dollar volatility. Moreover, the currency could facilitate bilateral trade bypassing the dollar, reducing exposure to U.S. sanctions and interest rate fluctuations.  

However, challenges remain. Disparate economic policies, governance concerns, and market acceptance could hinder its adoption. Yet, if successful, a BRICS currency could shift the global financial landscape, diminishing the dollar’s monopoly in international trade and finance.  

Conclusion

De-dollarization, while gaining momentum, is unlikely to destabilize the dollar’s dominance in the near term. The dollar’s trustworthiness, liquidity, and entrenched infrastructure make it indispensable for global trade. While geopolitical ambitions push nations to explore alternatives, these efforts highlight the challenges of replacing a currency that has become synonymous with stability. Instead of outright rejection, gradual diversification of reserves and trade currencies is more plausible, ensuring economic stability while reducing overreliance on the dollar.

For the foreseeable future, the dollar’s hegemony remains unchallenged. However, the world may witness an evolving financial ecosystem where multiple currencies play significant roles, fostering resilience in global trade.