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THE WAVE OF DE-DOLLARISATION

THE WAVE OF DE-DOLLARISATION

The weaponization of trade, the imposition of sanctions and the exclusion from SWIFT (Society for Worldwide Interbank Financial Telecommunication) by the US could trigger a faster de-dollarisation as countries displaying diplomatic and economic autonomy will be wary of using US-dominated global banking systems.The US dollar, which is the world’s reserve currency, can see a steady fall in the current context as leading central banks may look to diversify their reserves away from it to other assets or currencies like the Euro, Renminbi or gold. The notion of de-dollarisation sits well in the thought experiment of a multipolar world where each country will look to enjoy economic autonomy in the sphere of monetary policy.

Why De-Dollarisation

• De-dollarisation refers to reducing the dollar’s dominance of global markets. It is a process of substituting US dollar as the currency used for:

• Trading oil and/ or other commodities
• Buying US dollars for the forex reserves
• Bilateral trade agreements
• Dollar-denominated assets
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• The dominant role of the dollar in the global economy provides the US a disproportionate amount of influence over other economies. The US has for long used imposition of sanctions as a tool to achieve foreign policy goals.
• The de-dollarisation is driven by the desire to insulate the Central Banks of the Countries from geopolitical risks, where the status of the US dollar as a reserve currency can be used as an offensive weapon.

Causes of Dollar’s Prominence

• The US dollar sealed its position in the early 1970s with a deal with the oil-rich Kingdom of Saudi Arabia to conduct global energy trade in dollars.
• The status of the dollar was enhanced by the collapse of the Bretton Woods system; it essentially eliminated other developed market currencies from competing with the USD.
• Currently, about 60% of foreign exchange reserves of central banks and about 70% of global trade is conducted using USD.
• The psychological angle to considering the USD as a “safe-haven” asset is that people continue to view the currency as a relatively risk-free asset.
• Additionally, sudden dumping of dollar assets by adversarial central banks will also pose balance sheet risks to them as it will erode the value of their overall dollar-denominated holdings.
• Apart from the Euro and gold, most other foreign currencies have some inherent risks associated with them.
• For instance, with the historically “neutral” Switzerland joining the EU in imposing sanctions on Russia, it eliminates the Swiss Franc from being an asset that can work as a hedge against economic sanctions.

India's Scenario

• India has also had to work out alternative arrangements, including a barter arrangement, with certain sanctioned countries in the past.
• More recently, India and Russia are said to be considering the use of the Chinese yuan as the reference currency to facilitate oil trade between the two countries.
• Issue: Like Chinese renminbi, Indian rupee is not yet fully convertible at the exchange markets.
• Non-convertible currency creates difficulties for participating in the international market as the transactions take longer routes for processing.
• Non-convertibility implies an uneasy access to capital, less liquidity in the financial market, and less business opportunities.

The US dollar is still the favoured currency for trade because no other currency is liquid enough. Even if a currency does, there would be apprehensions in nations about that currency becoming a mirror of the US dollar. A mere change in regime along with having to bear the same manipulations albeit from a different country is not what the world wants. The only way forward would be to diversify the currency market with no one currency claiming hegemony.