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January 17, 2025 | 05:48 pm
TEMPO.CO, Jakarta - De-dollarization can be defined as the process of reducing reliance on the U.S. dollar as a reserve currency, for international trade, finance, and reserves. This trend has gained momentum in recent years as several countries have sought alternatives, particularly after the U.S. imposed sanctions on nations like Russia.
While the notion of de-dollarization is not entirely new, many still question various things surrounding the term, including the details of countries dropping the dollar.
Citing the U.S. News and J.P. Morgan, this article provides an in-depth analysis of the ongoing trend of de-dollarization.
Explaining the Reserve Currency
A "reserve currency" is a currency that is widely held by the majority of global governments and institutions for international trade and as a store of value. Historically, the reserve currency has been linked to powerful nations with strong, stable economies and political systems.
For much of the 20th century, the U.S. dollar held this status, establishing its dominance in global finance. But with recent geopolitical shifts and evolving global markets, the question is whether the dollar's supremacy will continue or be called quits.
Why is the Dollar the King?
The U.S. dollar, often referred to as the "petrodollar", has maintained its position as the world’s reserve currency due to several critical factors. One of the main reasons is its role in global oil transactions, cementing its bold stand as the preferred currency for buying and selling oil. As a result, demand for the dollar remains strong, as nearly all nations rely on oil for energy.
In addition, the dollar has long served as the ideal intermediary in many international trade transactions. This occurred when two certain countries made transactions using the U.S. dollar as payment, rather than either country's currency. This widespread use has contributed to the dollar’s dominance, which is reflected in its use for around 79% of the world’s international trade transactions.
Is De-Dollarization Coming?
The idea that de-dollarization could soon reshape global finance is a topic of significant debate. While several nations have been making strides to reduce their dependence on the dollar, there is still no clear alternative that can replace it on a global scale.
Despite these efforts, the U.S. dollar remains firmly entrenched due to factors such as the size of the U.S. economy, the depth of its financial markets, and the stability of its legal and political systems. Moreover, alternatives like the euro or yuan face significant challenges, such as political instability in Europe and China’s strict capital controls.
De-Dollarization Impact
The potential impact of de-dollarization is vast. If countries begin to shift away from the dollar, it could reduce demand for U.S. financial assets, leading to a depreciation of the dollar. This, in turn, could lead to higher borrowing costs for the U.S. government and American businesses. It could also spark inflation, as a weaker dollar would make imports more expensive.
Countries Dropping the Dollar
According to the U.S. News, countries like the BRICS group (Brazil, Russia, India, China, and South Africa), as well as Malaysia, are already in the process of establishing trade channels using currencies other than the U.S. dollar.
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