The Descent of the Dollar Supremacy
The dominance of the US dollar on the global reserve system is unquestionable. This currency has ruled for decades, and in a world where almost every country maintains dollar reserves, is replacing it even remotely possible?
Since the Bretton Wood Conference held in 1944, the dollar has secured a position in the global reserve system and this position has remained untouched by other countries. The USD was officially crowned as the ‘World Currency’. The very resilient economy of the USA, along with a stable political and social sphere has made the dollar fitting for this position. Towards the end of 2020, the States had $2.04 trillion of dollars in circulation, with almost half of the value estimated to be in circulation abroad. The foreign exchange market is influenced by the USD with 90% of trade settlements transacted in dollars. Moreover, 40% of world debt issued is in the same currency. However, with the turbulent global scenario, the currency has been weakening and its hegemony is fading away. And so, the world has begun to question the US Dollar supremacy. Today, several unfavorable macroeconomic situations are turning the tide against the pre-eminence of the currency. The ever increasing US fiscal deficit and debt are already proving to be a ticking bomb situation for the greenback, with new challenges constantly materializing . The increased share of other bluechip currencies in the world reserve system has led to the dwindling resilience of USD. Moreover, the American intention of cutting off Russia from the dollar-driven SWIFT system and the growing rivalry between China and the US have incentivised these Asian countries to de-dollarize. Nevertheless, it is important to note that de-dollarization is not a recent trend. Beginning in the 1990s, Latin America attempted to move away from the dollar. Venezuela, Chile and Iraq have followed suit too.
Whilst Russia and China are following up on this very initiative, several other countries have joined hands too. BRICS (Brazil Russia India China South Africa) is determined to alter the global finance system. It is a leading organization which is undertaking attempts to find reliable alternatives for dollars. ‘As a strong dollar has become a hazard for the global economy, economies across the world have realized the urgency of de-dollarization’, stated a report by BRICS. The Global Coordination for de-dollarization has been strengthened post the break out of the European wars. India, too, is a chief part of this maneuver. India's strong intent to de-dollarize is on account of the nation’s own financial interest. The Reserve Bank of India (RBI) proposed ‘The Global Rupee’ - INR trade settlement mechanism. More than 35 countries have shown interest in this mechanism owing to their dollar reserves deficiencies. Once included in the mechanism, foreign entities would have to change their native currencies directly into INR to settle their international transactions with India, thereby eliminating the dollar. The neighboring nations of Sri Lanka, Bangladesh, Nepal and Myanmar have been grappling with a shortage of dollar reserves. Moreover, as per reports, countries like Tajikistan, Cuba, Luxembourg and Sudan have also been in talks with India about using the mechanism. The PM Modi led cabinet wishes to explore this settlement mechanism with other nations too. The exclusion of dollars from the trade process would not require the RBI to find buyers of INR to sell USD in return. Thus, the demand for the INR would go up. Furthermore, the conversion charges would also be saved.
Meanwhile, China has always been persistent and consistent in its motive of dethroning the greenback. Xi Jinping, the prime minister of the Republic of China, wants to increase the use of the Chinese Yuan in cross-border trade settlements and investments. Along with that, the Asian country has signed bilateral currency swap agreements with neighboring countries like Uzbekistan, Kazakhstan, Russia, Tajikistan, and Pakistan since the early 2010s. These agreements involve exchange denominated in the Chinese Yuan and the counterpart currency, allowing the counterpart nation to access yuan at lower rates of interest. This has encouraged the partner countries to augment their imports from China as they receive monetary benefits for the same. The proportion of settlements in Chinese Yuan has increased substantially following China’s push for the internationalization of the yuan. According to Zhang Hanhui, Chinese Ambassador to Russia, in 2020, the proportion of China-Russia bilateral settlements using the yuan stood at 44.92% of the value of the total settlement, which represented $48 billion. The Russian government is at the forefront when it comes to de-dollarization and has been making its greatest strides post the imposition of sanctions from the West. The prominent fuel and oil companies are planning to incorporate higher levels of the yuan in their operations and transactions. The National Interest avers that addressing the united commitment of China and Russia to de-dollarize and at the same time, establish a financial system immune to the Western sanctions should be a pressing priority at the moment. South Africa too, is taking a stance against the dominating currency. In 2011 at the BRICS Summit, Rob Davies who was the Trade and Industry Minister, voiced his concerns over volatilities in exchanges and emphasized the benefits of trading in the local currency - South African Rand. Parallely, Brazil is, too, in the game of de-dollarisation. With China being the nation’s biggest trading partner, it is mutually beneficial to settle transactions in local currencies. This has been prompting Brazilinian’s policymakers to support the BRICS reserve currency. Nevertheless, the 2014 economic crisis of Brazil has weakened the country’s stand on de-dollarisation to a certain extent.
The world is slowly moving towards multipolarity. In this global de-dollarisation spree, with a strong role played by the EU, China, and other emerging economies, the dollar might just be witnessing its descent. Although, while the uncertain global outlook looms over the world, the concept of de-dollarization might not be very friendly to the overall macroeconomic situation. The over-dependence on the USD makes this idea a far-fetched dream. A sudden shift in the global reserve system can alter the universal forex market framework, which may not go down kindly with certain countries. The supreme dollar is still favored because no other currency can be liquid enough. So now, diversifying the basket of currencies in the reserve system without over-dependence on a particular currency is the only rational way forward. A gradual and cordial shift can grease the wheels of the economic engine.