WHAT IS DE-DOLLARISATION?

De-dollarization is a term that is given to the situation wherein countries across the globe start reducing the dominance of the US dollar as their only option for international trading, mode of exchange, and as a universal unit.

Many years back during the times of World War-1, the sterling pound was the mode of currency that was used across the globe as a standard unit of measurement. As the war came to an end, the US dollar started displacing the sterling pound and gradually became the primary mode of currency. Since then, till now, the US dollar has been the widely used primary mode of currency, which is now losing its value as other countries are trying to go for other alternatives.

WHY ARE COUNTRIES SHIFTING THEIR MODE OF CURRENCY FROM US DOLLAR?

At first, using the standard mode of currency under the Bretton Woods Agreement as US Dollar was benefiting other countries as the value of the USD was far better than stocks or gold. By the year 1970, this agreement was dissolved and hence, Asian countries started to upscale themselves which led to a huge negative trade balance in the United States. On this, the then-president of the US delinked USD from convertibility of USD to gold or any assets.

Due to this amendment, all global transactions were done in US dollars by nearly every underdeveloped and developing nation. This gave an excellent push to the US Trade Data and the value of the USD.

In the year 2014, the United States applied some major economic restrictions on Russia which created hurdles to trade in the USD. With this, the countries started finding alternative currency options for trading to reduce the monopoly of the USD as much as possible. Countries started shifting to currencies like the Euro, Pound, Ruble, Chinese Yuan, UAE Dirham, etc. which has declined the dominance of the USD in the market by almost 35% to date.

This decline has also impacted the US Trade Data negatively and the global circulation of the USD has been reduced by several folds. Russia is completely using Ruble as its primary currency for trading its crude oil and Russia as per Russia Trade Data of recent times.

One of the oldest journalists in the United States, Fareed Zakaria has said that the two big nations, namely China and Russia have teamed up and are deteriorating the value of the United States Dollar. He points out the claims and orders that are given to Russia and how they are promoting other nations to go for alternate currency resources.

ADVANTAGES FOR COUNTRIES TO GO FOR ALTERNATE CURRENCY OPTIONS

There are multiple advantages that are reaped by using alternate currency options by the countries to conduct their foreign exchange. Some of the prominent advantages are:

  • The dependence of countries on the USD has declined as now they have alternative options. This is the major benefit for those countries which are under the restrictions and sanctions of the United States.
  • By using multiple currency options, transaction costs, and multiple risks are reduced.
  • By using different currencies, a sense of integrity is developed amongst those countries that are using common currencies.

DISADVANTAGES OF USING ALTERNATIVE CURRENCY OPTIONS

There are some disadvantages attached to the de-dollarization process going on currently.  Some of the drawbacks of using different currency options are:

  • The first and foremost drawback is that there arise transition hurdles at various ports and countries if that chosen currency is not applicable or used at that port.
  • There are chances of short-term instability of other currencies as they are not widely accepted.
  • The acceptance of various currencies is not allowed in many places, unlike the USD.

 

 

CONCLUSION

In conclusion, we would like to state that the reliability of the United States Dollar is reducing by every passing year. The main causes behind this decline are the coming up of China, sanctions and restrictions on Russia, the shifting of countries to other currency alternatives, and concerns about the reliability of the USD. This decline is linear in nature and will continue in the upcoming years.

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Source Url: https://medium.com/@tradeimex11/what-is-the-impact-of-de-dollarization-on-the-global-economy-eabe6969e4aa