De-dollarisation of world economy- dream or reality?

Hey guys I m back after a long gap and thought of sharing my views on an important recent development.

Recently I received a message from a friend: ‘What if India moves away from US dollar as reserve currency?

This is one of the most engrossing ‘What ifs?’ in the global economy today.

This is the background: between 1999 and 2019, the dollar accounted for 96% of international trade transactions in the Americas, 74% in Asia and 79% around the rest of the globe (Source: Federal Reserve). The US dollar represented the central currency of the world. It was respected everywhere; it was transacted everywhere.

This is how dollarisation worked: an Italian farmer sold farm produce to a South Korean buyer; the proceeds may have been calculated as per their respective costs but was eventually converted into US dollars to facilitate the eventual transaction.?

However, a structural de-dollarisation shift could be emerging. ‘Move away from the US dollar as a reserve currency’ is being increasingly – unthinkably - discussed across India, China, Brazil, Malaysia and Bolivia, among other countries.

India’s External Affairs Minister Jaishankar recently used a word called ‘workarounds’, a polite term for a US dollar alternative. He also said: the world’s multipolarity would be reflected in ‘currencies and economic dealings.’ He actually used the word: ‘currencies’.

Why is the world seeking an alternative? Why now?

The US economy – the world’s largest – has been sluggish for long. The country is engaged in geo-political conflicts. It is engaged in US sanctions against prominent trade partners. ?When it imposed sanctions against Russia, a number of countries were not entirely pleased that the U.S. froze its accounts. A number of countries are dollar-deficient to buy global products, so a dollar alternative is needed. Besides, there are factors like unprecedented US inflation and US banking issues.

De-dollarisation has begun. Russia and China reduced the use of dollars in bilateral trade after the US excluded Russia from ‘SWIFT’ following the Ukraine war. Now 95 per cent of Russia-China trade of more than $200 billion has been conducted in roubles and yuan. The cumulative impact has had an outcome: the percentage of foreign exchange reserves held in the U.S. dollar has declined to 58% (lowest); reserves held in gold have increased from 11% to 15% in six years.

?China, India and Brazil are also contemplating mutual transactions in their respective currencies. Result: lower dollar importance. Besides, BRICS agreed to induct six countries (Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates), which could accelerate alternative currency traction. The Brazilian President Silva articulated the new: a single BRICS currency for members to transact with one another. This would have been inconceivable a decade ago.

What if de-dollarisation transpires?

One, this could increase US borrowing costs. Two, this would moderate its stock market. Three, the U.S. would need to moderate its government spending. Four, this could moderate US growth.

What this means for India is significant. The US is the world’s largest financial market. Following de-dollarisation, its economy could enter a period of extended sluggishness (or weakness). US investors will need to broadbase investments across?different countries (read emerging markets) to escape a re-run of what transpired in German stocks in the Thirties and in Japan from the Nineties onwards. The currencies and assets of these countries could well appreciate even as the value of the dollar declined. US investors would tend to move their funds to countries like India.

The advantages to India could be substantial.

A lower dependence on the US monetary policy and interest rate movements; reduced measuring of our currency’s strength against the US dollar; stronger economic relations with other trading countries; enhanced economic sovereignty and a stronger ?respect for the Indian rupee.

There would be some downsides as well: relatively lower acceptance of the rupee as a globally acceptable currency could result in higher transaction costs; there could be a probable US backlash (Trump?said that he would impose 100 per cent tariffs on imports from countries that moved away from the dollar) and other reserve management challenges.

One thing is becoming increasingly certain: de-dollarisation is where the world is headed. Will it happen overnight? Definitely not. Could it begin to happen across the decade. Quite possible. Could it happen across the next 20 years? Let me answer this the other way: you could land at an Asian airport and pay for the cab in rupees.

You may say I am a dreamer but am not the only one.

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