The world economy has been based for decades on the predominance of a single currency: the US dollar. However, countries anxious to minimize their dependence on the United States are trying to break away from it. This movement, known as de-dollarization, could not only change the global economic landscape, but also have major consequences for relations between countries. Focus on the phenomenon of dedollarization.
What is dedollarization?
Before explaining what dedollarizationit is important to understand the supremacy of the US dollar against other currencies in the world.
The dominance of the US dollar has been an inescapable part of the global economy since the end of World War II. It was during this time that the Bretton Woods agreements established the dollar as the world’s primary reserve currency, used to stabilize the currencies of nations participating in international trade. Since that time, the US dollar has become so important that most international transactions are denominated and settled in dollars.
The supremacy of the US dollar in the global economy gives the United States several advantages :
The dominance of the dollar gives the United States significant influence over global economic policies. They can use this influence to advance their economic and political interests; Since the US dollar is the world’s main reserve currency, the demand for it is high. This means that the US government can borrow at lower interest rates, which lowers the cost of debt; Since most international transactions are denominated in dollars, this eliminates currency risk for US companies and makes them more competitive in global markets; As the dollar is widely used and accepted across the world, it is generally considered a rather stable currency compared to others. This helps maintain economic stability in the United States.
However, this hegemony of the US dollar against other currencies is accompanied by many disadvantages for other countries. Among these :
Countries whose currency reserves are largely made up of dollars are economically dependent on the United States. If the US economy suffers, it can have a ripple effect on their own economy; The supremacy of the dollar gives the United States the ability to impose economic sanctions on other countries. Countries that find themselves opposed to American policies can be severely hampered in their development because of this particularity; Countries that borrow in dollars may face higher borrowing costs if the value of the dollar increases against their local currency; Moreover, if a country accumulates a large debt in dollars, a sudden depreciation of its local currency can make the repayment of this debt more expensive, potentially creating a financial crisis.
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Definition of dedollarization
Now that the context is set, what is dedollarization and why is it becoming more and more widespread? Concretely, dedollarization is the process by which a country reduces its dependence on the US dollar.
This process can take several forms, including reducing dollar currency reserves, encouraging the use of local currency for commercial and financial transactions, or establishing bilateral trade pacts that use currencies other than the dollar for settlement of transactions.
Dedollarization is often motivated by a desire to reduce U.S. economic and political influence, minimize the risk of dollar exchange rate fluctuations, enhance monetary and financial independence, or circumvent U.S. sanctions.
Of course, a country that chooses the path of dedollarization will face significant challenges, such as the increased volatility of its own currency, possible economic instability and the need to establish new commercial and financial relations with its neighbours. However, some countries see these challenges as an acceptable cost for greater economic independence in the longer term.
Case studies: the typical example of China
The list of countries implementing initiatives to de-dollarize continues to grow : Russia, India, Argentina, Brazil, Saudi Arabia, Egypt, Iran, etc. Not all of them have started a complete dedollarization, but they are at least engaged in a sectoral dedollarization, for example for the exchange of raw materials.
However, one country particularly stands out from the others with regard to the dedollarization of its economy: China. For several years now, China has undertaken efforts to reduce its dependence on the US dollar and promote the internationalization of its own currency, the yuan (or renminbi).
Here is an overview of the various initiatives implemented by China to achieve this goal.
Currency swap agreements
China has currency swap agreements in place with more than 30 other central banks, allowing it to switch from the US dollar to the yuan in trade with these countries.
Bond issuance denominated in yuan
China has started issuing yuan bonds in international markets. This not only helps internationalize the yuan, but also allows China to borrow at lower interest rates.
The “One Belt, One Road” initiative
Under this initiative, China funds infrastructure projects in many countries, often using the yuan, helping to expand the use of its currency globally.
The digital yuan
China has been experimenting with its own digital central bank currency (MNBC) for a few years, namely the digital yuan. Its wider introduction could potentially facilitate its use in international trade.
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The possible consequences of dedollarization on the global economy
Large-scale dedollarization would have several potential consequences for the global economy.
Currency volatility and currency risk
First of all, if countries start moving away from the dollar in favor of other currencies, this could lead to greater exchange rate volatility. The US dollar has generally been viewed as a safe haven in times of economic turmoil, in part due to the size of the US economy. If countries began to hold reserves in a wider variety of currencies, this could make exchange rates more sensitive to country-specific economic shocks.
Reorganization of the global financial system
Second, uA global dedollarization movement could lead to a broader reorganization of the global financial system. Currently, many international financial institutions, such as the International Monetary Fund (IMF), are heavily dominated by the US dollar. A reduction in the use of the dollar could give more weight to other currencies and change the balance of power within these institutions.
Impact on the US economy
Thirdly, dedollarization would also have consequences for the US economy itself. Currently, the global demand for dollars allows the United States to borrow at relatively low interest rates and maintain higher debt levels. If the demand for dollars declines, it could cause interest rates to rise, making debt service more costly for the US government.
Impact on developing countries
Finally, developing countries that rely heavily on the dollar for international trade and investment could also be affected. If the dollar were to lose its status as the world’s reserve currency, these countries could be forced to manage a more diversified reserve portfolio and navigate a more volatile exchange rate environment. This could represent a significant challenge, especially for countries that have less developed financial institutions.
Conclusion on the phenomenon of dedollarization
In sum, if dedollarization were to occur on a significant scale, it could lead to major changes in the structure of the global economy.. However, the US dollar has long played a central role in the global economy, and it is likely to remain prominent for now.
With the advent of blockchain technology and cryptocurrencies, some believe that digital currencies could eventually serve as new reserve currencies. This includes both cryptocurrencies like Bitcoin (BTC) and central bank digital currencies (MNBC).
The arrival of central bank digital currencies could potentially accelerate the dedollarization process. The issuance of MNBCs by central banks can facilitate international transactions, reduce transaction costs and improve financial inclusiveness. These advantages could encourage the adoption of these currencies in place of the US dollar for certain types of transactions.
Nevertheless, Adoption of MNBCs will depend on many technical and regulatory factors. Security, privacy, interoperability and regulatory issues will need to be resolved before MNBCs can be widely adopted.
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Editor-in-chief of Cryptoast, I discovered Bitcoin and blockchain technology in 2017. Since then, I have been striving to share quality content so that the sector becomes more democratic for everyone.
Clement Wardzala
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