The start of 2023 had the world questioning an ongoing economic crisis. With giant banks going bankrupt, tech giants laying off employees, and just utter chaos economically. Amid the start of the war between Russia and Ukraine, The world has closely observed seismically altering trends in the fields of economics, geopolitics, and culture. The world is marching towards an even distribution of global power rather than being hyper-fixated on one dominant one. In this case, the United States—is perhaps the conflict’s most significant effect on the world (and is still having). Furthermore, the tendency toward de-dollarization is what underlies much of this pace.
Several of the largest economies in the world are looking for alternatives to the US dollar because they are sick of an overvalued and freshly armed greenback.
Smaller countries, many of them in Asia, are experimenting with de-dollarization in 2023 as well. Since they are concerned about additional dollar strength, corporations all across the world are selling an unprecedented amount of their debt in local currencies.
Where Did it Come From?
De-dollarization’s impact has been, observably, a long-term process that has arisen over the previous two decades, and this has to be made clear right now. Despite the US economy’s declining share of global output over the past two decades, the dollar continues to play “an outsized role” in international markets, according to a March paper from the International Monetary Fund (IMF). It also continues to dominate global trade, international debt, and non- bank borrowing, far exceeding the US’s share of trade, bond issuance, and international borrowing and lending.
The IMF also further noted that Dollar’s foreign exchange reserves fell below 59% in the final quarter of last year, forging a two-decade decline.
“Strikingly, the decline in the dollar’s share has not been accompanied by an increase in the shares of the pound sterling, yen, and euro, other long-standing reserve currencies” IMF had said. “Rather, the shift out of dollars has been in two directions: a quarter into the Chinese renminbi, and three quarters into the currencies of smaller countries that have played a more limited role as reserve currencies.”
What is Dollar To Global Economy
The Bretton Woods Agreement made the U.S. dollar the recognized reserve currency of the world, backed by the greatest gold reserves on earth. Other nations amassed US dollar reserves as opposed to gold reserves.
Countries started purchasing U.S. Treasury securities because they needed a place to store their dollars and thought it was a secure place to keep their money.
The dollar continues to be used as the global reserve currency. The International Monetary Fund estimates that central banks hold approximately 59% of their reserves in U.S. dollars (IMF).
The majority of the reserves are in the form of cash or US bonds like US treasuries. Foreign debt held in dollars is still increasing, with levels expected to reach $13.4 trillion by the middle of 2022.
The majority of the global economy would assume that this makes the dollar the world’s strongest currency. The dollar was ranked as the 10th strongest currency by CMC Markets despite its prominent position and dependence on international markets. The British pound and the euro were ranked fifth and eighth on the website’s list of strongest currencies, respectively, while the Kuwaiti dinar claimed the top spot.
As Russia invaded Ukraine in February 2022, financial sanctions against Moscow were imposed under American leadership. The decision by Western governments to freeze nearly half ($300 billion) of Russia’s foreign exchange reserves and the exclusion of major Russian banks from SWIFT, an interbank messaging system that facilitates international payments, are two of the most significant of these.
The two largest geopolitical competitors of the US, Russia, and China, have inevitably promoted their alternative financial infrastructures as a result of these sanctions, which some have referred to as the “weaponization” of the dollar.
But it’s not only Russia and China. Nations and regions have intensified efforts in recent months toward agreements aimed at lessening their dependency on the dollar, from India to Argentina, Brazil to South Africa, and the Middle East to Southeast Asia.
Some have claimed the visible de-dollarization impact as “dethroning the dollar”. And while that sounds like a myth-fiction title, it is what these sanctions and team-ups are aiming to do. The dollar as a universally accepted currency in the entirety of the global economy is something quite significant.
The real question now is…
If Not “Dollar” Than What?
If the powerful nations of the world do embrace the sanctions and the claims of “dethroning” the dollar, what will be the next universal currency?
Speaking for Russia, the economy seems to have chosen the Chinese Yuan as an alternative. According to The Wall Street Journal, Payments to energy exporters are increasingly made in yuan. Russia is employing the Chinese currency to keep its oil money in its sovereign-wealth fund, which serves as a war chest to bolster government expenditures weighed down by Ukrainian military expenses. Yuan, commonly known as the renminbi, is being used as a form of borrowing by Russian businesses and as a means of saving families.
Of course, it’s easy to laugh at the idea that any currency other than the US dollar would soon rule the globe. But, as this year has demonstrated, world dynamics may change suddenly.
With the tremendous power struggles between the US, China, Russia, and many other countries, the multipolar world that seems to be emerging can only entail greater erosion of the dollar’s dominance.