Eight decades have elapsed since the Bretton Woods Conference, which solidified the U.S. dollar as the cornerstone of both American economic policy and the global financial system. Throughout these years, there have been numerous predictions regarding the dollar’s impending decline, and now, those predictions are manifesting as the dynamics of the global economy shift. The Triffin dilemma, which highlighted the inherent conflict between national interests and global monetary stability, is becoming irrelevant in the context of a transitioning world toward a multiple reserve currency system. The discussion is no longer about whether a crisis or technological innovation will dethrone the dollar; rather, it centres on how both adversaries and allies of the U.S. are testing the boundaries of the financial system. In a world where the U.S. dollar remains dominant, the post-Cold War consensus is disintegrating, revealing the fragility of its supremacy.

Relying less on the US dollar as the official or primary reserve currency for cross-border trade is known as de-dollarization. As nations look to diversify their foreign exchange reserves, lower currency risk, and assert more monetary independence, this movement has gained speed recently, especially with the formulations of major global south blocs and the increasing Chinese presence in the South China Sea. From a realist perspective, the shift away from the US dollar can be seen as a strategic move by states to maximize their power and security in an anarchic international system.

Facts and Figures

The value of worldwide merchandise trade increased by 12% to $25.3 trillion in 2022, owing in part to high global commodity prices. In 2022, the value of global commercial services trade increased by 15% to $6.8 trillion. With the advent of global and advanced economies and regulations promoting international trade even at the semi-urban level, there is little doubt that trade between countries is becoming increasingly complex. De-dollarization undoubtedly brings with it a slew of challenges for which the world may be unprepared. Moreover, according to the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) survey, the share of US dollar reserves held by central banks declined to 59%, its lowest level in 25 years, during the fourth quarter of 2020.

The dynamic nature of international relations, characterized by a move towards a multipolar world order with the emergence of the global south and significant developments in the Indo-Pacific region, adds to the discourse surrounding de-dollarization and its growing influence. As the dollar’s importance shrinks, countries must renegotiate and redefine trade conditions, such as pricing, invoicing, and settlement systems. This necessitates coordination and cooperation among countries and international organizations, adding another complication to global trade. 

Changing Shifts in the Light of Global Trade

Nations of the global south, including major players like India and China, are primarily adopting these changes. They recognize the influence of the USD and have been actively seeking an alternative solution to facilitate global trade. With increasing U.S. sanctions on other Asian powerhouses like Russia, Moscow must look at alternative trade routes in central Asia, where demographic and geographic factors make sanction control difficult.

Russia, despite being heavily impacted by the war in terms of its trade policies and ambitions, has taken proactive measures. Last year, Russia announced its alternative to the well-known SWIFT system (The System of Transfer of Financial Statements). Notably, a similar system called the Cross-Border Interbank Payments System already exists in China, further indicating shared concerns over Washington’s dominance and the Dollar’s hegemony.

BRICS and its Ongoing Expeditions

A major player in this debate, without which the discussion on de-dollarization would be incomplete, is BRICS (Brazil, Russia, India, China, and South Africa). These nations have recently called for a new BRICS currency to facilitate bilateral trade and commerce. The proposed BRICS currency is a potential game-changer for global trade and international relations. It represents a new union of rising powers that, in terms of GDP, collectively outweigh the current hegemon, the United States, and even the entire G-7.

The potential initiatives of BRICS Plus concerning de-dollarization and its implications for the international monetary system can be categorized along several lines. These include promoting the use of local currencies, creating substitute financial systems, enhancing institutional cooperation, and addressing related difficulties and limitations, especially in the global south.

In terms of economics and global trade, the potential success of a BRICS-issued currency is a relatively new concept due to the USD’s entrenched position in world trade. Despite numerous practical considerations that need to be resolved, there is no doubt that such a currency could supersede the US dollar as the reserve currency among BRICS member nations. Furthermore, it has the potential to disrupt and challenge the Dollar’s dominant position, unlike previously proposed currencies such as the Chinese Yuan.

When countries work together at an institutional level, their trade becomes more balanced. If one country spends more than it earns, others can help, similar to European countries and organizations like the European Union. This further implies their independence from the US dollar. Instead, they can use each other’s currencies for trade and investment. Groups like BRICS are starting to do this by using their own money and creating new payment systems that don’t rely on the US dollar and this is rising as a significant challenge to the current dollar hegemony.

Apart from this, de-dollarization has several possible advantages for developing nations. Relocating away from the US dollar could increase their monetary autonomy and lessen their reliance on changes in US monetary policy, allowing them to better adjust their policies to their domestic economic circumstances. All of these policies also inculcate a movement towards a policy of multilateralism; with major blocs like the global south coming into the picture. In addition, especially the ruble and the yuan, the diversity of reserve currencies will surely act as a hedge against changes in exchange rates and reversals in capital flows, lowering the risk of financial crises and enhancing overall financial stability.

Challenges and the Prevalence of Dollar Hegemony

However, in the long run, the facts provide Washington some relief. Despite significant changes in the international monetary system over the last sixty years, the US dollar continues to maintain its position as the prevailing global reserve currency.

This phenomenon can be attributed to various factors, with one significant reason being the dollar’s exorbitant privilege, which provides the US with extraordinary financial benefits. The liquidity of the US dollar is a primary reason it remains the currency of choice for trade. This liquidity factor stands as a primary obstacle for digital currencies like the Digital Chinese Yuan, which have not achieved the desired level of success. Secondly, the dominance of the US dollar is deeply ingrained in the global trade and financial system. Many commodities, such as oil, are priced in dollars, and significant financial institutions and contracts are denominated in dollars. Nations with a high degree of dollarization, such as some Central American countries, may find it financially burdensome to contemplate a drastic policy reform.

These measures highlight the challenges and intricacies associated with transitioning from the US dollar to the global trade system. More influential nations must take the lead in addressing these complexities, as smaller states may face macroeconomic complications. Governments can collaborate to establish payment systems based on non-dollar currencies, fostering economic ties and potentially reducing their dependence on the US dollar. Forming stronger alliances based on trust and economic cooperation is crucial for achieving shared goals.

Conclusion

De-dollarization is not merely an important and ever-changing process but a necessary step towards a more multipolar world order. It has broad implications for monetary policy, international trade, individual nations, financial stability, and the global economy. While developing powers may benefit from lower currency risk and greater monetary autonomy, challenges such as capital flight, exchange rate volatility, and potential impacts on international financial markets must be addressed.

Policymakers must take proactive steps to address the challenges and opportunities presented by de-dollarization. Firstly, diversifying the foreign exchange reserves and promoting international trade in local currencies is crucial. Apart from this, developing the domestic market and strengthening economic ties with other countries, especially developing nations is another important tool that cannot be neglected. Secondly, general macroeconomic policies aiming at low inflation levels, stability control among nations, and joint investment projects by the global south, are required as well. As nations navigate the de-dollarization process, these strategies will for sure support a robust and stable global economy and facilitate trade in the economy without any challenges and problems that the US dollar so enjoys.