De-dollarisation: the race to attain the status of global reserve currency

Subject : Economy

Section: External Sector

Concept :

De-dollarisation

De-dollarisation refers to the replacement of the U.S. dollar by other currencies as the global reserve currency.
A reserve currency refers to any currency that is widely used in cross-border transactions and is commonly held as reserves by central banks.
China and Russia are among the nations that have supported de-dollarisation.
Iran and Russia will jointly issue a new cryptocurrency backed by gold, to serve as a payment method in foreign trade.

Need for de-dollarisation:

The U.S. imposed several sanctions that restricted the use of the U.S. dollar to purchase oil and other goods from Russia.
This has been seen by many countries as an attempt to weaponise the dollar.
Since international transactions carried out in the U.S. dollar are cleared by American banks, this gives the U.S. government significant power to oversee and control these transactions.
Currently, the Chinese yuan is seen as the primary alternative to the U.S. dollar owing to China’s rising economic power.

Advantage of a reserve currency advantage

A reserve corruncy is the foreign currency held by central banks (in India’s case, RBI) to:
facilitate international transactions,
stabilise exchange rates and
bolster financial confidence
Other currencies such as the British pound and the French franc have served as international reserve currencies in the past.
It is the currencies of economic superpowers that have usually ended up being used as the global reserve currency.
Critics of the U.S. dollar believe that the global reserve currency status gives the dollar unfair privileges over other countries, thus justifying de-dollarisation attempts by many countries.
It should be noted that when a country’s fiat currency enjoys reserve currency status, it gives the country the power to purchase goods and other assets from the rest of the world by simply creating fresh currency out of thin air.
However, such irresponsible expansion of the money supply can cause the debasement of the currency and eventually threaten its status as a reserve currency.

Why dollar is so popular?

The U.S. dollar is widely used in international transactions because people actually prefer to use the American currency over others for various economic reasons.
A recent attempt by India and Russia to carry out trade between the two countries in Indian rupees rather than in U.S. dollars has hit a roadblock because the value of India’s imports from Russia far outweighs its exports.
This left Russia with excess rupees in hand which it was unwilling to spend on Indian goods or assets, and led to Russian demands for the settlement of bilateral trade in U.S. dollars.
The high level of trust that global investors have in the U.S. financial markets, perhaps owing to the ‘rule of law’ in the U.S., is considered to be a major reason why investors prefer to invest in U.S. assets.