Since World War II, the US dollar has held its position as the world’s reserve currency, dominating international trade and financial systems. However, a combination of political and economic factors is gradually eroding its supremacy. With nearly 60% of international reserves held in dollar-denominated assets, according to the International Monetary Fund, and the dollar being the most widely used currency for trade, the world’s reliance on the dollar has been significant. But now, several reasons are prompting countries to explore alternatives and consider reducing their dependency on the dollar.
Concerns over US monetary policy
As the issuer of the world’s reserve currency, the US wields considerable influence over the global economy. This dominant position has given the US what has been termed an “exorbitant privilege.” However, other nations have grown uneasy with the level of control the US exercises over the world economy. US monetary policies can have far-reaching impacts on other countries, forcing them to closely align their policies to avoid negative spillover effects. Some countries, like India, have expressed frustration over being held hostage by US monetary policies and have started exploring alternatives, such as using their own currencies for trade.
The strong dollar pressures emerging nations
The appreciation of the US dollar against other currencies has made imports more expensive for emerging nations. Countries like Argentina have experienced pressure on their local currencies and inflation due to a decline in US-dollar reserves. This situation has pushed some countries to explore using other currencies, like the Chinese yuan, for trade payments. A stronger dollar could discourage its use as a reserve currency and lead borrowers to seek alternatives, potentially undermining the dollar’s position in the global market.
Diversification of global trade and oil demand:
The US dollar’s status as the world’s reserve currency was largely solidified by its use in trading oil, particularly in the Gulf countries in the Middle East. However, the global oil market has undergone significant changes with the rise of the shale-oil industry in the US, making the US energy independent and a net oil exporter. This structural shift in the oil market could impact the role of the dollar as the dominant reserve currency. Additionally, tensions between the US and Saudi Arabia, a key oil exporter, raise the possibility that Saudi Arabia may consider re-orienting its oil pricing away from the US dollar.
The desire to move away from the dollar-dominated world is driven by a mix of geopolitical, economic, and energy-related factors. Countries like Brazil, Argentina, Bangladesh, and India are among those exploring alternative currencies and assets for trade and payments. While the dollar’s position as the world’s reserve currency remains robust for now, the long-standing unease over its dominance, coupled with recent global developments, suggests that the dollar’s status may continue to face challenges in the future.
