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December 3, 2024 | 01:43 pm
TEMPO.CO, Jakarta - President-elect of the United States (US) Donald Trump threatened to impose a 100 percent tariff on BRICS countries, if the alliance uses an alternative currency to replace the US dollar. "The idea that BRICS countries are trying to move away from the Dollar, while we just stand by and watch, has PASSED," Trump wrote on his social media platform, Truth Social, on Saturday, November 30, 2024, quoted from Antara.
As known, BRICS, an acronym that refers to Brazil, Russia, India, China, and South Africa, has started to realize the risks associated with excessive reliance on the US dollar. They voiced a commitment to reduce reliance on the US dollar in international trade and finance transactions. This commitment is known as dedollarization.
Dedollarization is a process of reducing the dominance of the US dollar in international trade. Dedollarization has become part of their economic strategy and monetary policy to reduce the risks associated with US dollar fluctuations and achieve economic independence. So, what are the impacts of dedollarization for the United States?
1. Increased Borrowing Costs
Quoted from Investopedia, borrowing costs in the US will increase if the dollar loses its status as the world's reserve currency. This will make access to capital more difficult and the cost of doing business in that country more expensive. In this situation, the dollar is no longer king. The US stock market may also experience a decline in value. Moreover, the US has long relied on the role of the dollar as a reserve currency to support government spending deficits and international trade.
2. Inflation Occurs
The value of the dollar continues to decline due to the lack of interest in the currency market, causing the US to face inflation. Quoted from US News, having a world reserve currency has allowed America to experience large deficits in both international trade and government spending. If foreigners no longer want to hold dollars for savings, this will force significant government spending cuts. The dollar itself has been the world's reserve currency since 1971 and is used in almost 90 percent of all transactions.
3. Loss of Market Oil Influence
According to the J.P.Morgan, dedollarization makes the US dollar lose influence on global oil prices. When the dollar strengthens, the prices of imported oil rise, and as a result, demand decreases, especially in emerging markets. However, now more oil sales are transacted in non-dollar currencies like the renminbi. This condition also indirectly reduces foreign investments in the US economy.
4. Loss of Dominance
Quoted from Cointelegraph, dedollarization will reduce the dominance of the global capital market, where worldwide transactions are in dollars. This phenomenon is likely to weaken the security and stability of the US dollar. This includes the US position as a leading economic, political, and military force in the world. Changes in the value of the dollar also affect world trade, investment, and financial stability, especially in the US.
5. Worsening US Finances
Dedollarization causes depreciation and the performance of financial assets in the US worsens compared to other countries in the world. When dependence on US dollars decreases, central banks will start disposing of their dollar reserves. This will result in hyperinflation, a spike in interest rates to compensate for the loss of purchasing power, and a fall in asset prices, which will further accelerate the decline of the US economy.
COINTELEGRAPH | INVESTOPEDIA | USNEWS | JPMORGAN | MYESHA FATINA RACHMAN
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