The US dollar is gradually falling from grace in the global financial architecture on account of rising distrust and diversification efforts made by countries that are ditching the hegemony of the greenback. Simultaneously, world's population is rising; therefore international trade in other currencies may augur well.
The share of the US dollar in the global foreign exchange reserves has slid to its lowest in 29 years, according to the latest data published by the International Monetary Fund. Although the dollar is slowly losing its grip, it is still strong because of liquidity, stability and the established mechanism.
The greenback's long-standing status as the world's dominant currency has been jeopardised in recent years amid concerns over the soaring US debt and its sanctions on rivals such as Russia, according to the RT news channel.
As part of Russia sanctions that followed the escalation of Ukraine conflict in February 2022, the US cut off the country's central bank from dollar transactions.
It later banned the export of dollar banknotes to the country and spearheaded a drive to freeze Russian assets abroad. Foreign Affairs magazine wrote in June that the sanctions on Russia had "undoubtedly left other central banks wondering whether their own dollar-denominated rainy-day funds would be locked up should their governments run afoul of Washington."
In a speech at the BRICS summit in Kazan in October, Russian President Vladimir Putin warned that Washington's weaponisation of the dollar through sanctions and denying countries access to the Western financial system was a "big mistake" that would force them "to look for other alternatives, which is what is happening."
Economic and public policy expert, corporate and management consulting firm Director Qanit Khalilullah said the global economy was witnessing increasing de-dollarisation as countries diversify their trade and foreign exchange reserves. "This trend is driven by US actions to weaponise the dollar, such as imposing sanctions and freezing reserves, as seen in the case of Russia."
These actions have eroded trust and raised fears of over-dependence on the dollar. Additionally, rising calls for a multipolar economic world, regional trade blocs like BRICS and technological advancements in digital currencies have created alternatives.
De-dollarisation reflects a desire for greater financial autonomy and reduced exposure to the US monetary policies, signaling a shift towards a more decentralised global monetary system.
Countries are moving away from the US dollar to reduce vulnerability to geopolitical risks and sanctions. The US tendency to use the dollar as a political tool has alarmed nations, prompting them to seek monetary independence.
Furthermore, reliance on the dollar exposes countries to the US Federal Reserve policy actions, which impact exchange rates and trade balances. Emerging economies are forming regional partnerships and adopting alternative currencies like the yuan or euro.
Digital currencies and central bank digital currencies (CBDCs) further enable nations to bypass dollar-based financial systems, secure sovereignty and facilitate localised trade settlements.
"The decline in the dollar's share in global reserves to a three-decade low reflects a broader shift in the international monetary landscape. While this signals reduced dominance, it does not necessarily mean the dollar is falling from grace. Its role as a global reserve currency will remain strong due to its liquidity, stability and established infrastructure," Khalilullah said.
"However, diversification into other currencies reflects diminishing reliance on the dollar amid geopolitical tensions and economic shifts. The dollar's status may gradually decline but will remain central to the global economy in the foreseeable future," he said.
Although "non-traditional" currencies are gaining ground, despite the downward trend, the dollar has so far remained the pre-eminent reserve currency.
On the one hand, it highlights a structural change in the global monetary system, where non-traditional currencies like the yuan and digital alternatives are gaining ground in trade and reserves. This signals an evolving multipolar world order. On the other hand, it underscores the enduring dominance of the US dollar, which continues to serve as the pre-eminent reserve currency due to its long entrenched use in international settlements, high liquidity, global trust and the absence of comparable alternatives.
The distinction lies in recognising the growing diversification versus sustained reliance on the dollar's unique advantages.
Rising sanctions have coerced Russia to de-dollarise. September data shows that Moscow and its allies in the BRICS group are making a better use of national currencies, which are utilised in 65% of mutual trade settlements.
BRICS' growing use of national currencies signals significant progress towards de-dollarisation. This trend shows efforts to reduce dependence on the dollar, especially in light of the sanctions and geopolitical dynamics.
However, the dollar's deeply entrenched role as a global reserve currency, supported by liquid markets and historical trust, is unlikely to be displaced substantially in the short term. Instead, the global economy may move towards a diversified system where the dollar coexists with regional currencies, fostering a multipolar monetary order where no single currency dominates entirely.
International trade expert and economic analyst Aadil Nakhoda said there had been several instances of de-dollarisation throughout history, starting with the yen, then the euro, the yuan and now a currency being planned by BRICs.
The yen and the euro have made a little impact. The availability of an alternative currency in the global market is a key factor in de-dollarisation.
Rather than ditching the greenback, countries are trying to create their own narrative for dominance in the global market. With US policies becoming more trade restrictive, this narrative will likely grow.
The trade deficit generated by the US results in higher supply of the US dollar in foreign markets. As efforts are made to curtail it, it may result in lower supply and consequently its reduced dominance.
An international currency must not only be easily available but also involves less government intervention through policies. The yuan is heavily state-controlled while other currencies are unlikely to reach eminence.
"We may see mutual agreements becoming more common as they reduce the risk involved with a third currency. However, trade between countries not involving BRICs is likely to continue in dollars. It is when these countries adopt other currencies, will we see non-dollar-based trade becoming more eminent. Consider how the dollar is prevalent in informal trade," Nakhoda said.
The writer is a staff correspondent
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