For nearly eight decades, the US dollar has reigned supreme as the world’s primary reserve currency and the chief means of exchange in international trade. However, countries like Brazil, China, and Russia are increasingly trying to dethrone the greenback. This article explores the concept of de-dollarization, the strategies countries employ to challenge the dollar, and the potential implications for the United States.
De-Dollarization Explained: Reducing Dependence on the US Dollar
The term “de-dollarization” refers to the process by which countries reduce their reliance on the US dollar as their primary reserve currency. The US dollar’s dominance can be traced back to the Bretton Woods Agreement, which established the currency as the key player in global trade following World War II. Consequently, commodities like crude oil and natural gas are traded in dollars.
The US dollar’s supremacy provides the United States with significant economic leverage. For instance, Washington could freeze half of Russia’s foreign currency reserves and bar its largest banks from the SWIFT international payments system in response to Russia’s invasion of Ukraine in February 2022. De-dollarization efforts aim to diminish the power and influence of the United States in the global economy.
Challenging the Dollar: China and Russia Lead the Charge
China and Russia have emerged as the main drivers of de-dollarization. In December, China urged Middle East suppliers to accept the Chinese yuan instead of the US dollar for oil transactions. According to Credit Suisse analyst Zoltan Pozsar, President Xi Jinping’s visit to Saudi Arabia marked the “birth of the petroyuan.”
Russia has also accelerated its efforts to reduce dependence on the dollar. For example, President Vladimir Putin signed an executive order in March 2022 that prohibited “unfriendly” countries from settling natural gas contracts in any currency other than the Russian ruble. Moreover, China and Russia and other BRICS member countries have expressed their commitment to potentially developing a new reserve currency to replace the dollar.
Assessing the Threat: Should the US Be Concerned?
While there is evidence that the world is gradually moving away from the US dollar, it remains the dominant reserve currency. However, according to the International Monetary Fund (IMF), the dollar’s share of foreign exchange reserves has decreased from 71% to 60% since the beginning of the 21st century.
In a notable development, Brazil announced in March that the Chinese yuan had surpassed the euro as the second-largest currency in its foreign reserves, sparking concerns about the dollar’s status. However, the yuan’s share of global foreign exchange reserves remains low at 2.7%, as per the IMF. Therefore, analysts believe that it is unlikely that any currency will replace the dollar shortly.
In a research note, Goldman Sachs argued that the yuan, pegged to the dollar and closely controlled by the Chinese government, would face significant challenges in becoming the world’s top transaction currency. A team of strategists led by Kamakshya Trivedi stated, “There is a lot of inertia in reserve currency status. So far, and likely for long, attempts at de-dollarization remain contained and constrained.”
The Evolving Landscape of Global Currency Power
As countries like China and Russia continue to push for de-dollarization, the global economic landscape is gradually shifting. While the US dollar’s dominance may not be immediately threatened, these developments underscore the need for the United States to remain vigilant and adapt to the evolving dynamics of international trade and finance.