Contesting the hegemony of the dollar
#GS-02 International Relations, #GS-03 External Sector
The threat to Dollar centric trade
Countries outside the West particularly the Global South are finding ways to circumvent dollar in their international trade through;
- Currency swap agreements;
- Trade in national currencies bypassing the dollar;
- Steps towards trading oil and gas in national currencies;
- The promotion of such arrangements by regional organisations;
- The setting up of special accounts for internationalising national currencies; and
- The setting up of financial communications systems.
The reason for this de-dollarisation
- Trade wars against China since 2018 have set China to move away from the dependency on dollar.
- The Russia-Ukraine war also hastened this development since it has forced Russia to trade oil and commodities in Ruble and other national currencies.
- The steady but unequal growth of the ‘emerging economies’ is another major cause for economic diversification.
- This becomes evident when you see that the combined GDP of China, India, Russia, South Africa, Indonesia, Brazil, Iran and Turkey is larger than that of the G7 countries.
- Since 2015, BRICS’s New Development Bank has been disbursing up to 50% of its loans in national currencies in order to encourage trade and investment in national currencies.
- Bilateral currency swaps among ASEAN countries, China, Japan, South Korea are on the rise.
- Emerging economies have initiated trade in national currencies bypassing the dollar mainly due to high exchange rates of the dollar.
- Another serious challenge to the hegemony of the dollar comes from the trade of oil and gas outside the dollar zone.
Why de-dollarisation is not probable
- One challenge for de-dollarisation is that the national currencies are not fully convertible.
- Despite the rise of alternate systems of trade dollar still makes up 60% of the global currency.
- It will also pose major challenge to the countries that have trillions of dollars as reserve currency including China.
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