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Dedollarization Trend: Challenges and Consequences

Updated: Aug 18, 2023



The US dollar's position as the primary reserve currency of the world continues to be crucial to the multilateral trading system as we know it, notwithstanding its current difficulties. Ironically, the US government, which has supported the dollar's dominance for decades, poses the greatest immediate threat to it.


Questions over the dollar's unchallenged dominance arise as criticism of US monetary policy from countries like China, Russia, Iran, Brazil, and Saudi Arabia increases, potentially changing the global economy significantly.


The most recent government debt ceiling impasse shocked the whole financial sector. Fitch Ratings' recent downgrade of the US credit rating underscored skepticism about the government's ability to ensure financial stability, raising questions about the trustworthiness of the "full faith and credit of the US government."


One further significant concern comes from the dollar's increasing militarization. The US-led sanctions have hurt the economies of the targeted nations, including North Korea, Iran, and Russia, but they have also encouraged these countries to lessen their reliance on the US financial system.


The economic repercussions that followed have shown that, despite the high costs of avoiding the US financial system, they are insignificant in relation to the possible loss of central bank reserves or other assets. Concerns about the dollar becoming a weapon are further heightened by the idea of seizing such assets, which is supported by certain US commentators as a response to geopolitical disputes.


What could be able to take the place of the dollar if it were to lose its privileged status is the crucial question that arises. The most promising currency at the moment is the euro, which accounts for 20% of global central bank reserves. The euro is less appealing due to issues including Europe's fragmented sovereign-debt markets and uncertainties brought on by the UK's exit from the EU.


Many people have speculated about the potential of a "multi-currency" future in which the dollar would play a smaller role. But such a change would possibly restructure the multilateral trading system, replacing the flow of products and services based on price and quality with one based on changing foreign exchange rates.


It is critical to understand that once nations stop building up currency reserves, they may turn to trade barriers and other unfair trade practises to preserve a balanced trade. The multilateral trading system, which is based on agreements like the General Agreement on Tariffs and trading and the World Trade Organisation, would be undermined by this situation. Despite the system's detractors, it has promoted global innovation, cost-cutting, and poverty reduction.


Protecting the dependability of its currency is crucial for the US. Supporting those affected by globalisation through social safety nets, job training, and education is crucial. Ending partisan brinkmanship over problems like the debt ceiling and foreign asset freeze, which damages international confidence, and using discretion when imposing unilateral financial sanctions are equally important.






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