22 central banks have their currencies pegged to the US dollar. (Representative image/Reuters)
Dedollarization essentially means reducing reliance on the US dollar as a medium of exchange or reserve currency.
Argentina announced on Wednesday April 26 that it would pay Chinese imports in yuan instead of the US dollar. This brought the term dedollarization back into the spotlight. As the world debates the pros and cons of de-dollarization, let’s take a look at what the term means and its possible impacts on the global economy.
What is dedollarization?
Dedollarization essentially means reducing reliance on the US dollar as a medium of exchange or reserve currency. The US dollar has dominated the global economy for decades, as all central banks, treasuries and major corporations around the world keep a large portion of their currency holdings in US dollars.
Today, more and more developing countries are calling for a reduction in the use of money.
Why has dedollarization been in the news in recent months?
Since the beginning of the Russian-Ukrainian war, the discussion around de-dollarization has reached its zenith.
Since Russia was cut off from international dollar trading systems due to sanctions, many countries have sought alternative payment options.
India is also among the countries that try to settle international transactions in local currency. Rupee trade settlement is already used by 19 countries, as reported fortune india.
Bangladesh has become the latest country to join the rupee trade settlement system. Banks from countries like Malaysia, Russia, New Zealand and Singapore have already been allowed to trade under the system.
In a separate move, the BRICS grouping (Brazil, Russia, India, China and South Africa) discussed increased cooperation, including a common currency for trade between them, in March this year.
Is dedollarization possible?
Overreliance on the US dollar as a reserve currency has its pitfalls, as seen during the coronavirus pandemic. The US Federal Reserve has been printing dollars at an unprecedented rate, causing inflation and global imbalances.
The pandemic and economic crisis in places like Sri Lanka and Lebanon have led countries to take proactive measures to preserve their foreign currency reserves. One of these measures is dedollarization.
But the dominance of the US dollar on the world stage is difficult to dislodge. It is the de facto currency of East Timor, Ecuador, El Salvador, Palau, Marshall Islands, Panama and the Federated States of Micronesia, according to the American Institute of Economic Research.
Apart from that, 22 central banks have their currencies pegged to the US dollar. The lack of consensus on which currencies to use for international transactions is also a factor to consider.
Overall, the US dollar will likely maintain its dominance in the global economy over the next few years.
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