De-dollarisation and the Emerging Multi-polar Currency World

Although there are undeniable benefits in conducting business with a single currency, which include lower transaction costs, a highly integrated and compact global financial system, reduction in volatility, some even make us believe the dollar is the lubricant in international trade and?finance. The?free reign has already started slowing down and might come to an open?and competitive end. Those who still revere the almighty dollar and probably hedge their asset in it might start having a rethink at the end of this article.?

?Dollar's Global Dominance??

?Before US's 1917 involvement in the world war, the?pound sterling was the international reserve currency.?After the war, the United States became the world's leading financial power almost overnight, came out of the war significantly stronger than its European peers, and displaced the pounds sterling globally.?In 1944, 44 nations signed the Bretton Woods Agreement, establishing a collective international currency exchange mechanism based on the US dollar, and subsequently pegged it to the price of gold.?European and Japanese exports grew increasingly competitive with US exports by the late 1960s, leading to large demand and supply of dollars all over the world.?

?In 1971, the bid to strengthen the value of the dollar made President Nixon put an end to the direct convertibility of US currencies to gold, and this effectively ended the gold standard, as well as the limit on the amount of dollar that could be printed (the United States can print dollar with impunity, approximately $3.3 trillion in 2020 alone).?Despite maintaining the international reserve currency, the US dollar has decreased in purchasing power since then. Recently, there has been a geopolitical acceleration of two major developments - countries shifting away from the dollar as the world's reserve currency, mainly due to the US's weaponization of the dollar as an economic sanction tool, and secondly, increasing emphasis on bilateral currency swaps.??

?Dollar Weaponization, and the Russian Factor?

?The most serious challenge to the dollar's dominance is its weaponization. Russian funds and assets worth almost $600 billion were frozen in a matter of days. Nonetheless, Russia managed to reduce the dollar's share of its trade between 2013 and 2020 from nearly 80% to 55%. Earlier sanctions on Iran and Venezuela, then Russian oil, resulted in increased energy costs, resulting in global inflation and depreciation of most currencies. More countries are beginning to have concerns about the dominance of the US, and are gradually but steadily abandoning the US dollar as their reserve currency. Since the United States and other Western nations imposed economic sanctions on Russia in response to its invasion of Ukraine, Moscow, and the Chinese government have been working together to reduce reliance on the dollar, and ruble-yuan trade has surged by eighty percent.??

?Russia and Iran are also working on establishing a cryptocurrency backed by gold. Similarly, many central banks have purchased gold at the fastest rate since 1967 as countries seek to diversify their reserves away from the dollar. China has been selling its US treasuries, reducing its holdings from one $1 trillion to $859 billion, an all-time low, with an aim to diversify to other assets outside the reach of the US government.???

Bilateral Currency Swaps??

?The petrodollar's significance is eroding as Saudi Arabia seeks to hedge and diversify its security by normalizing relationships with neighboring countries. An example is China's purchase of?25% of Saudi oil, with an agreement to settle the trade in Yuan in order to diversify away from the dollar. This was a bit unthinkable a few years ago, and it's an idea I have advanced in different intellectual discussion forums.?Furthermore, bilateral trading between governments and accepting each other's currencies is becoming the new standard in order to lessen reliance on the US dollar. 18 countries that include?Germany, Singapore, the United Kingdom, Kenya, Sri Lanka, and Malaysia?have all agreed to trade in Indian rupees.??

?Similarly, Brazil and China agreed to trade in Yuan. So far, China has signed agreements for Yuan clearing bilateral trade with 41 countries. Saudi Arabia and Iran have formally requested to join the BRICS (Brazil, Russia, India, China, and South Africa ) organization, one of the world's most important economic blocs, representing more than one-quarter of global GDP, and 42 percent of the world's population. Also, Brazil and Argentina discussed the possibility of a unified currency. Southeast Asian countries are working on de-dollarization efforts, UAE and India are discussing the use of rupees to trade non-oil commodities in place of the dollar, and for the first time, Saudi Arabia has stated it is open to trading in currencies other than the US dollar.?

?US Economic and Banking Crisis?

?Due to the high level of confidence in the US economy, investors ( and corrupt politicians) see the dollar as a safe haven asset, particularly during economic downturns. This certainty is reflected in the higher demand for dollars. But with the recent economic and banking crisis plaguing the US, much of this confidence is beginning to erode.?The US financial system, which serves as the backbone of global trade, is becoming more vulnerable. The 2008 financial crisis and the most recent Silicon Valley Bank?(SVB) and Signature Bank collapse revealed obvious weakness, which was driven majorly by poor economic decisions in a bid to tame inflation. The aftermath of the financial crisis is expected to force the US economy into a slight recession later in the year, with a prediction of subdued growth,?a weakening economy, and an increased?likelihood of a recession.?

?The US debt is at an all-time high, accounting for 123.4 percent of the country's nominal GDP. Every year, the United States borrows $2-3 trillion to run its economy and pays $1.3 billion in interest every single day. With the present borrowing trajectory, the dollar could undoubtedly face a crisis in the near future, and the rest of the world is bracing for it.?Most countries that trade with the United States recognize that the country's internal debt is unsustainable in the long run, and have started reducing their exposure to dollars.?

?On a lighter note, the dollar is still the defacto currency for diaspora remittance. Are we going to see a?shift from the dollar to Chines Yen, India Ruppe, or Russian Rouble? Only time will tell. But for now, it's still a case of a dollar at hand.??

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