From domination to slow decline: Why is the dollar slowly losing importance in international trade?
Today let’s start with a question.
Do you know who holds the title of the number one superpower in the world?
Yes, you guessed it right! It’s the United States. And when it comes to the dominant reserve currency, there’s no competition for the US dollar.
Over decades the United States has had a remarkable hold over the world’s economy, politics, and military, making it a superpower in every sense. The significance of the US dollar is so strong that it could be called the uncrowned king of the financial world.
But, many countries no longer want the dollar to hold this significance. And hence the initiative to boycott the US dollar has begun.
Six big countries have ditched the US dollar and have started settling trades in their local currencies.
Do you remember, during mid-2022, India internationalised its currency and started to settle its oil trades with Russia using the Indian Rupee? That was just the beginning. Today, India has signed pacts with 18 nations which are ready to settle trade using our local currency. Malaysia was the recent addition to the list.
This is a huge game changer because currencies drive commerce, and this shift will surely hurt the United States.
Besides India, Iran, sanctioned by America, has fully abandoned the US dollar to settle trade with China and Russia.
Saudi Arabia, the major hand of OPEC, has also declared that it will abandon Petro-dollar and start accepting Petro-Yuan. This basically means that oil trades will not be settled in dollars but in Yuan.
Brazil and China recently signed a pact to trade using the Chinese Yuan and Brazilian Real.
Also, amidst the Russia-Ukraine conflict, Moscow had to abandon the US dollar, and these days they have also been using the Chinese Yuan in international trade. It is also planning to launch a joint BRICS currency which will be used among Brazil, China, India, and Russia.
Lastly, China plans to pitch Yuan as an alternative currency to the US dollar to settle international trade with OPEC countries.
Why is Everyone Suddenly Against the US Dollar?
The United States has a special advantage because the US dollar is the world’s reserve currency. Every country needs to hold the US dollar to settle trades for important purchases like oil and gold. They can’t just use their own currencies. This is a big deal because it means that all other countries have to work hard to earn US dollars, creating demand for USD.
Secondly, when a country trades with other countries using its own currency, it does not have to use its foreign currency reserves to settle the trade. Hence, the country can manage its foreign reserves more effectively. Essentially, using its own currency in trade allows the country more control over its financial resources.
Using its own currency in international trade can protect a country’s economic interests. For example, when India needed Russian oil but faced obstacles due to Western countries, India used the Indian rupee to settle payments and maintained access to the Russian markets.
Internationalising a currency has drawbacks as it exposes the currency to more external shocks. But the benefits outweigh the risks. The change will be significantly seen as more countries join hands to settle trades in their local currencies.
Although the dollar still holds a dominant position, it’s clear that the era of the dollar’s supremacy is slowly coming to an end.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!