De-dollarisation: Yet another hiccup or for real?

The ongoing de-dollarisation campaign reminds me of Edward Hickson’s Moral Song (1857): “If at first you don’t succeed, try, try again.”

For many years, many countries around the globe were getting concerned over Washington’s impositions of economic and trade sanctions as a form of weaponisation of the dollar, prompting them to diversify their portfolio of foreign currency reserves. Besides, years of brewing exasperations of sovereign countries were piling up for being subjected to US banking jurisdiction while making transactions in dollar. More recently (February 24, 2022), Russian invasion of Ukraine and the near-choking sanctions regime that followed have triggered the resurrection of de-dollarisation campaign (DDC) to weaken the dollar’s hegemony with more fury and fire than ever before. 

On bilateral front, China and Brazil recently agreed to settle mutual trade transactions directly in local currency, bypassing the US dollar; ASEAN members meeting in Indonesia recently deliberated how to lessen their dependence of financial transactions on the dollar, the euro, the yen, and the pound sterling and use domestic currency more for settlements; India and Malaysia agreed to use rupees, amongst other developments.

Past sporadic hiccups of DDC by euro, yuan, and rubble notwithstanding, the dollar has been steering its global hegemony nearly undeterred. However, the ongoing DDC seems to be gaining fresh momentum under the banner of BRICS (acronym for Brazil, Russia, India, China and South Africa) led by China. The campaign got further boost by Saudi Arabia, Iran and Egypt’s readiness to ride on BRICS bandwagon. Two more weak economies struggling with hyperinflation, Turkey (58.5 per cent) and Argentina (100.2 per cent) have also lined up to join.

The dollar as reserve currency had its ups and downs, declining from around 85 per cent in the 1970’s to bottom at 47 per cent in 1990 but then steered a U-turn, reaching 71 per cent in the early 2000’s - now havering around 60 per cent. However, unlike any other currency, the dollar upheld its resiliency and retained its anti-fragile attributes during the 2008 financial crisis and the Covid-19 pandemic.

The advent of the euro in 1999, a currency of a monetary union comprising of 20 Eurozone countries, each with its own independent fiscal policy gained a mere 20 per cent share of the dollarised global reserve currency (GRC) after 23 years of uphill battle. China’s yuan, after decades of unrelenting contentious campaign against the dollar, gained an insignificant 3 per cent  of GRC behind the Yen (5.2 per cent) and the Pound Sterling (4.9 per cent). Referring to the lackluster success of the euro, the 1999 Nobel Laureate economist Robert Mundell theorised that in order for a consortium of countries to espouse a common currency, they must meet some prerequisites such as similar business cycles, near frictionless labour and capital mobility and risk sharing mechanism.

What about the DDC led by BRICS? The campaign may have triggered the debut of a seemingly much stronger nudge yet in the trend of de-dollarisation. The question is: How likely and how soon would DDC succeed? I argue that the dominance of the dollar to be a history of “bygone days” will not happen so soon and so easily.

First of all, BRICS is just a collection of countries which don’t have much in common with each other – essentially a cocktail of countries with free market capitalism (democracies) and mixed economies (autocracies). Most of these countries trade more with the US and Europe, than they do together. China and India were mutually at daggers drawn recently with border disputes. Russia is in economic and financial self-destruct mode (forcing Bangladesh to make Nuclear Reactor loan installment payment in Yuan, if not  in Ruble); Brazil has fallen a decade behind in economic growth; while South Africa got stuck in a recessionary ditch even before the pandemic. Besides, BRICS countries lack the necessary level of trust and institutions to actually create a currency viable enough to serve as a GRC. Even China has baggage of some deficiencies — highly centralised and doesn’t have free, liquid, and deregulated capital markets to challenge the US dollar.

The US economy, with GDP of nearly $25 trillion vs. China’s $18.00 trillion, is the largest, most flexible, and open enough to accommodate large trade deficits caused by the dollar’s predominant status. Besides, being the most stable democratic system with rule of law, effective checks and balances, and free media, the U.S. stands out as the most reliable economy and the largest and vibrant financial market for domestic and foreign investors. Nearly 50 per cent  of international trade is invoiced in dollars, and nearly the same per cent of all international loans and global debt securities are denominated in dollars. Currency trades in the foreign exchange markets involve the dollar nearly in 90 per cent of all transactions. It may be noted that there are approximately $1.74 trillion paper dollars in circulation of which overseas circulations are roughly estimated to be in the rage of 40 to 72 per cent.

It is estimated that more than 33 per cent of global GDP comes from countries that peg their currencies to the dollar. Seven among these countries have adopted dollar as their domestic currency and another 89 countries have been maintaining their currency in a narrow trading range relative to the dollar.

The dollar is just one of the world’s 185 currencies but most of the remaining 184 are used for domestic transactions. Historically, the dollar has been playing a unique role in U.S. balance of trade as being the top export. It makes the balance of trade tilted in U.S. favour like no other product. Thus the dollar reigned with little challenge so far and has greatly uplifted America’s geopolitical standings with privileges and prestige unattainable by other economies. What a power to have your printed paper buy all other countries physical goods and services and in turn they use the same paper currency to buy the same across the globe. Why would the dollar surrender so easily and so soon?

For a currency to qualify as GRC, the holding country must meet four most desirable prerequisites. The country (a) must have a large and advanced economy, (b) must be able to withstand internal and external shocks, both short-term and long-term; (c) must exude global confidence in long-term political stability and economic prosperity; (4) must have liquid and transparent financial/capital markets.

Currently, neither the euro nor the yuan satisfy all four fundamentals. Even if BRICS countries launch a novel GRC, they will still hold a large chunk of their reserves in dollars and dollar denominated assets to trade with dollar transaction economies.

The dollar is not only the official currency of the US, it is also the official currency of five US territories and seven sovereign nations. Additionally, it’s the quasi-official currency of many other nations that commonly accept dollar in addition to a local currency. For example, in 2021, nearly 400 million people throughout the world collectively used the dollar as their official currency of exchange which, in turn, translated into more than $20 trillion dollars of economic activity.

Foreign countries experiencing high inflation tend to dollarise their domestic currency to combat domestic inflation. Because the purchasing power of dollars is much more stable than that of a weak domestic currency, and individuals and businesses prefer using dollars for making transactions or hoarding wealth. Even years after the domestic inflation has been anchored, the love and fancy for dollar persist.

Every year the economies around the world are becoming increasingly integrated and interdependent. An economist would argue that international trade and transactions are more efficiently managed and better served by having more than one viable and stable reserve currency to compete with and cut the monopoly of the dollar. However, for that to happen, the novel reserve currency must pass litmus test of the four prerequisites.  

Dr. Abdullah A Dewan, formerly a physicist and a nuclear engineer at Bangladesh Atomic Energy Commission, is professor of Economics at Eastern Michigan University, USA.
[email protected]