Despite the ongoing movement, the dominance of the dollar is unlikely to disappear easily and quickly, given how pervasive the dollar is in financial markets. De-dollarization cannot happen at a rapid pace because the infrastructure required to make it happen is extremely daunting because all governments and countries will have to change the way they deal with currencies.
Displacing the dollar from another currency on a global level is not possible, because in order to achieve it, the countries that are “adamant” in not using the dollar will have to face a series of economic consequences, more specifically:
1. Payment issues
Countries that de-dollarize are at greater risk of experiencing payment problems. India, which insisted on buying Russian oil in rupees and dirhams – the currency of the United Arab Emirates – last year. Traders said this prompted the return of at least seven India-bound ships carrying oil to Russia.
Disputes over payments stem from the fact that other currencies are not nearly as liquid as the dollar because the dollar is so widely used in global markets and held by central banks.
According to the Bank for International Settlements, the dollar was used in 88% of all daily foreign exchange transactions in April 2022 and accounted for 54% of all foreign exchange reserves, according to International Monetary Fund data.
Other currencies, such as China’s yuan, are bound by strict capital controls, which also make them less liquid and therefore less attractive than the dollar. It is also difficult to quickly increase the liquidity of a currency without causing high inflation.
There are a lot of people who are reluctant to trade and hold stocks and wealth and bank accounts in the yuan because it is not a fully free-floating currency. So there are limits to it.
2. Limited trade
Countries trying to phase out the dollar could stifle their imports and exports. Again, this is because the dollar is the most widely used currency in the world – and not using that currency could limit a nation’s range of trading partners, which also affects economic development.
Russia is one such example. The country “renounced” the dollar after Western sanctions were imposed on it in 2022. Ditching the dollar only further isolates the country from international markets, which could further weaken the Russian economy. In practice, however, this does not happen because the Russian economy continues to export its products to other countries, mainly to China and in general to the BRICS.
3. Lost value
Central banks risk making a “bad investment” by holding other currencies, since the dollar is a superior store of value. According to the US dollar index, which weights the greenback against a basket of foreign currencies, the greenback has appreciated about 40% since its low point in 2011. Meanwhile, currencies such as the yuan have depreciated against the greenback over the past decade.
There aren’t “too many” countries in the world de-dollarizing on a large scale, with exceptions like Russia where geopolitical tensions with the US have affected economic policy.
Since the dollar is so widely used in financial markets, it is estimated that it will take decades to displace the dollar, if it ever does. The dominance of the dollar will take a long time to reverse due to its reputation as a safe haven.
Only at the end of a massive global economic and financial collapse could another basket of currencies emerge to replace the dollar.
