{"id":1401,"date":"2023-05-03T00:00:00","date_gmt":"2023-05-03T00:00:00","guid":{"rendered":"https:\/\/www.nextias.com\/current_affairs\/uncategorized\/03-05-2023\/de-dollarisation-2\/"},"modified":"2025-07-30T17:35:35","modified_gmt":"2025-07-30T12:05:35","slug":"de-dollarisation-2","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/current-affairs\/03-05-2023\/de-dollarisation-2","title":{"rendered":"De-dollarisation"},"content":{"rendered":"<p><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong><u>In News<\/u><\/strong><\/span><\/span><\/span><\/p>\n<ul>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">There&#8217;s a growing trend of countries<\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong> sidestepping the US dollar (de-dollarisation)<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> and choosing to use their own local currencies for bilateral trade.<\/span><\/span><\/span><\/li>\n<\/ul>\n<p><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong><u>What is de-dollarisation?<\/u><\/strong><\/span><\/span><\/span><\/p>\n<ul>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">De-dollarisation is a term that refers to the process whereby countries <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>tend to reduce their reliance on the US dollar as a reserve currency,<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> medium of exchange, and also a unit of account.\u00a0<\/span><\/span><\/span><\/li>\n<\/ul>\n<p><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong><u>Why is the US dollar used so widely?\u00a0<\/u><\/strong><\/span><\/span><\/span><\/p>\n<ul>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>Dominance of Dollar: <\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">After <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>World War II,<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> the US dollar replaced the <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>British pound<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> as the dominating currency worldwide. In 1944, the <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>Bretton Woods Agreement<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> established the dollar as the <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>world\u2019s reserve currency.<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> The original Bretton Woods Agreement is dead, but the dollar remains the international reserve currency.<\/span><\/span><\/span><\/li>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>Trade deficit of US:\u00a0 <\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">U.S. has been running a persistent trade deficit for decades now (in fact the last time the U.S. ran a trade surplus was way back in 1975). The<\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong> excess dollars <\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">that the rest of the world accumulates due to the U.S. &#8216;s trade deficit has been invested in U.S. assets such as in debt securities issued by the US government.\u00a0<\/span><\/span><\/span><\/li>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>Popularity of U.S. assets among investors: <\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">The high level of trust that global investors have in the <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>U.S. financial markets,<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> perhaps owing to the <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>\u2018rule of law\u2019 <\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">in the U.S., is considered to be a major reason why investors prefer to invest in U.S. assets.<\/span><\/span><\/span><\/li>\n<\/ul>\n<p><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong><u>What is Reserve Currency?<\/u><\/strong><\/span><\/span><\/span><\/p>\n<ul>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">Reserve currencies are <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>foreign currencies held by central banks <\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">and other monetary authorities to facilitate international transactions, stabilize exchange rates, and bolster financial confidence.<\/span><\/span><\/span><\/li>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">These currencies are typically characterized by their<\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong> stability, liquidity, and wide acceptance in global markets,<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> which make them attractive for holding and conducting international transactions.<\/span><\/span><\/span><\/li>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">A reserve currency is also used by central banks to prepare for<\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong> international debt obligations and to influence their domestic exchange rate.<\/strong><\/span><\/span><\/span><\/li>\n<\/ul>\n<p><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong><u>Global Efforts Towards Dedollarization<\/u><\/strong><\/span><\/span><\/span><\/p>\n<ul>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">In recent years, several countries and regions have embarked on the path towards dedollarization, driven by a combination of <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>geopolitical, economic, and strategic considerations.\u00a0<\/strong><\/span><\/span><\/span><\/li>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">Notable examples include China, Russia, Brazil and the European Union, each of which has taken steps to reduce their reliance on the US dollar in international transactions and financial markets.<\/span><\/span><\/span><\/li>\n<\/ul>\n<p><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong><u>Why are de-dollarisation attempts being made?\u00a0<\/u><\/strong><\/span><\/span><\/span><\/p>\n<ul>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>Sanctions by U.S.: <\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">The U.S. imposed several sanctions that restricted the use of the U.S. dollar to purchase oil and other goods from Russia, and this has been seen by many countries as an attempt to weaponise the dollar.\u00a0<\/span><\/span><\/span><\/li>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>Power to control transactions by U.S.:<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> Since international transactions carried out in the U.S. dollar are cleared by American banks, this gives the U.S. government significant power to oversee and control these transactions.\u00a0<\/span><\/span><\/span><\/li>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>To end U.S Hegemony:<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> Some countries, like China and Russia, have sought to diminish the influence of the US dollar as a means of countering perceived American hegemony and mitigating the impact of US sanctions.\u00a0<\/span><\/span><\/span><\/li>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>To Promote their own currency: <\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">Other countries, particularly those in the Eurozone, have pursued dedollarisation to promote the international use of their currency, the euro, in a bid to enhance their global economic standing and secure greater financial autonomy.<\/span><\/span><\/span><\/li>\n<\/ul>\n<p><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong><u>Challenges Towards Dedollarisation<\/u><\/strong><\/span><\/span><\/span><\/p>\n<ul>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>Threat to Global Financial Stability: <\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">As countries reduce their reliance on the US dollar, adjustments in the composition of global reserve assets may lead to <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>shifts in capital flows and changes in asset prices.<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> In the absence of adequate policy coordination and risk management, these fluctuations could create<\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong> financial instability.<\/strong><\/span><\/span><\/span><\/li>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>Alternative currency:<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> Creating a viable alternative to the US dollar presents a formidable challenge. To achieve the requisite degree of stability, liquidity, and acceptability, an alternative reserve currency must be underpinned by a robust economy, deep and liquid financial markets, and sound monetary and fiscal policy frameworks. Currently, <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>no single currency fully meets these criteria,<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> although the euro and the Chinese yuan have made strides in this regard.\u00a0<\/span><\/span><\/span><\/li>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>Increased volatility in Exchange rates: <\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">Dedollarisation could result in increased volatility in currency exchange rates, particularly during the initial phases of transition. This, in turn, could <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>impact trade, investment, and capital flows,<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> particularly for countries with less developed financial markets or limited policy tools to manage exchange rate volatility.\u00a0<\/span><\/span><\/span><\/li>\n<\/ul>\n<p><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong><u>Should India Focus on De-dollarisation?<\/u><\/strong><\/span><\/span><\/span><\/p>\n<ul>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>Benefits:<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> It could <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>reduce the vulnerability to fluctuations<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> in US monetary policy and enhance monetary autonomy, enabling them to better <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>tailor policy actions to the domestic economic conditions.\u00a0<\/strong><\/span><\/span><\/span>\n<ul>\n<li style=\"list-style-type:circle\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">Moreover, the <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>diversification of reserve currencies<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> could provide a buffer against currency fluctuations and capital flow reversals,<\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong> reducing the likelihood of financial crises<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> and improving overall financial stability.<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>Challenges:<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> As developing countries transition away from the US dollar, they may face <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>heightened exchange rate volatility, <\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">which could impact trade, investment, and capital flows.\u00a0<\/span><\/span><\/span>\n<ul>\n<li style=\"list-style-type:circle\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">Additionally, the development of deep and liquid domestic financial markets \u2013 a prerequisite for currency internationalisation \u2013 could prove to be a formidable challenge for countries with less developed financial systems.\u00a0<\/span><\/span><\/span><\/li>\n<li style=\"list-style-type:circle\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">Furthermore, the potential costs associated with the transition, such as adjustments to existing trade and financial arrangements, may be significant and could strain limited resources.<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong><u>Way Ahead<\/u><\/strong><\/span><\/span><\/span><\/p>\n<ul>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">In light of these considerations, developing countries like India should adopt a prudent and measured approach towards dedollarisation. Policymakers must strike a <\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"><strong>delicate balance<\/strong><\/span><\/span><\/span><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\"> between the potential benefits of reducing reliance on the US dollar and the risks and costs associated with such a transition.\u00a0<\/span><\/span><\/span><\/li>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">While dedollarisation presents opportunities for a more diversified and resilient global financial system, it also poses significant challenges that must be carefully managed to ensure the preservation of global financial stability and sustained economic growth.<\/span><\/span><\/span><\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type:disc\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">Developing countries such as India must carefully weigh the potential benefits and risks associated with this transition.<\/span><\/span><\/span><\/li>\n<\/ul>\n<p><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#000000\">Source: <\/span><\/span><\/span><a href=\"https:\/\/www.thehindu.com\/business\/Economy\/de-dollarisation-the-race-to-attain-the-status-of-global-reserve-currency\/article66805365.ece\" style=\"text-decoration:none\" target=\"_blank\" rel=\"noopener\"><span style=\"font-size:12pt\"><span style=\"font-family:Arial\"><span style=\"color:#1155cc\"><u>TH<\/u><\/span><\/span><\/span><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In News There&#8217;s a growing trend of countries sidestepping the US dollar (de-dollarisation) and choosing to use their own local currencies for bilateral trade. What is de-dollarisation? De-dollarisation is a term that refers to the process whereby countries tend to reduce their reliance on the US dollar as a reserve currency, medium of exchange, and [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":1402,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21],"tags":[26,46],"class_list":["post-1401","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-current-affairs","tag-gs-3","tag-indian-economy-related-issues"],"acf":[],"jetpack_featured_media_url":"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2023\/07\/4377032Screenshot_6.png","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/1401","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=1401"}],"version-history":[{"count":1,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/1401\/revisions"}],"predecessor-version":[{"id":49755,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/1401\/revisions\/49755"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media\/1402"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=1401"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=1401"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=1401"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}