US Fed Governor Christopher Waller recently said: “If these sanctions and policies are long-lasting, the shifting cross-border payments landscape, including the rapid growth of digital currencies, could also pose challenges to the dominant role of the US dollar”.
There has been an increasing trend towards ‘de-dollarisation’ or trade in non-dollar currencies between several countries in recent years. This has been attributed primarily to what has been dubbed by leaders of several countries as well as many analysts as the ‘weaponisation’ of the dollar – or imposition of strict sanctions on countries. The most recent instances being a series of stringent sanctions imposed on Iran and on Russia (in the aftermath of the Russia-Ukraine war).
There is no doubt, that China is keen to capitalise on the changing global economic and geopolitical situation and wants to create an alternative financial system, where the dominance of the US Dollar is reduced (well over half of global reserves are held in the US dollar). Significantly, March 2023 witnessed the cross-border payments made in RMB (48%) surpassing those made in USD (46.7%).
It is not just countries like China, Iran and Russia -- part of an anti-US axis -- which have been promoting de-dollarization, but even countries which share robust ties with the US which have been pushing for lesser dependence on the US dollar – two prominent examples of the same being India and UAE. These countries have been using non-dollar currencies for purchase of commodities. An estimated 1/5th of global trade in oil was carried out in non-dollar currencies in 2023.
Well over 90% of bilateral trade between Russia and China was carried out in either the Yuan or the ruble, while Russia and Iran also signed an agreement to carry out Non-Dollar trade in December 2023. India also purchased oil from UAE in Indian Rupees in December 2023 (an agreement had been signed for trade in local currencies between both countries in July 2023).
The US has acknowledged the possible impact of de-dollarization on the US Dollar. US Fed Governor Christopher Waller recently said: "If these sanctions and policies are long-lasting, the shifting cross-border payments landscape, including the rapid growth of digital currencies, could also pose challenges to the dominant role of the US dollar".
Waller in the past has emphatically stated that the US dollar is unlikely to lose its status of being the world’s reserve currency or its important in trade and finance. According to certain reports, advisors of Republican Presidential Candidate and former US President, Donald Trump have been exploring punitive measures against countries which are seeking to move away from the US Dollar.
It is not only the US, but even other countries which may be using de-dollarization -- for trade in commodities – which do realize that it is premature to write off the US dollar. One prominent example is India.
In this context a former Governor of India’s Reserve Bank of India (RBI), D Subba Rao -- while speaking at an event in Mumbai recently -- remarked: "America enjoys an "exorbitant privilege" because dollar is world's reserve currency"( former French Finance Minister Valery Giscard d'Estaing in the 1960s coined the term exorbitant privilege). The former RBI governor also underscored the point that several countries were looking beyond the US Dollar due to the US tendency to weaponise the same.
It would be pertinent to point out, that Beijing while pitching hard for an alternative financial order would not be in favour of the dollar collapsing given that a large chunk of Beijing’s foreign reserves – estimated at $3 trillion – are invested in US bonds.
Another point which is forgotten is that while some members of the BRICS+ grouping have been pitching for a BRICS currency, one of the members of the grouping India has been cautious regarding this proposal. New Delhi’s strained ties with Beijing apart from other reasons are one of the main reasons for the opposition to the same (India has sought views from several think tanks on this proposal).
In conclusion, while there is no doubt that US sanctions have resulted in many countries moving away from the US Dollar it is important to bear in mind that the US dollar has significant advantages which have been discussed earlier and while de-dollarization may have gained momentum, the domination of the US Dollar is here to stay. It is not just economic factors, but geopolitical dynamics which will ensure the same.
The author is a policy analyst and faculty member at the Jindal School of International Affairs, OP Jindal Global University, Sonipat.
(Disclaimer: The views expressed above are the author's own and do not reflect those of DNA)
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