The US dollar has been the dominant currency in the world for decades, but its supremacy is being challenged by other countries that are seeking to reduce their dependence on it. This phenomenon is known as de-dollarization, and it has significant implications for the global economy and geopolitics.
What is de-dollarization and why is it happening?
De-dollarization is the process of reducing the use of the US dollar in international trade and finance. It can take various forms, such as:
- Increasing the use of other currencies, such as the euro, the yuan, or regional currencies, for bilateral or multilateral trade and investment.
- Diversifying foreign exchange reserves away from the US dollar and into other assets, such as gold, cryptocurrencies, or special drawing rights (SDRs).
- Creating alternative payment systems or platforms that bypass the US dollar and its associated institutions, such as SWIFT or the IMF.
There are several reasons why countries are moving towards de-dollarization, such as:
- Reducing their exposure to US sanctions and financial pressure. The US has been using its economic and financial power to impose its will on other countries, especially those that are perceived as adversaries or rivals, such as Iran, Russia, China, Venezuela, or Turkey. By reducing their reliance on the US dollar and its associated institutions, these countries hope to gain more autonomy and sovereignty in their economic and foreign policies.
- Hedging against the risk of dollar depreciation and inflation. The US has been running large fiscal and trade deficits for years, which have been exacerbated by the COVID-19 pandemic and the massive stimulus measures taken by the US government and the Federal Reserve. These actions have raised concerns about the long-term value and stability of the US dollar, especially as other countries are developing their own digital currencies or strengthening their monetary policies.
- Promoting their own currencies and interests in the global arena. Some countries, such as China or the European Union, have ambitions to challenge the US hegemony and increase their influence and role in the global economy and geopolitics. By promoting their own currencies and creating alternative payment systems or platforms, they hope to enhance their competitiveness and attractiveness for trade and investment.
What are the implications of de-dollarization?
De-dollarization has significant implications for the global economy and geopolitics, such as:
- Reducing the demand for US dollars and Treasury bonds. As countries diversify their foreign exchange reserves away from the US dollar and into other assets, they will reduce their demand for US dollars and Treasury bonds, which are considered safe-haven assets. This could lead to higher interest rates and lower bond prices in the US, which could affect its economic growth and debt sustainability.
- Increasing the volatility and uncertainty in the global financial system. As countries use different currencies and payment systems for international trade and finance, they will increase the complexity and fragmentation of the global financial system. This could lead to more volatility and uncertainty in exchange rates, capital flows, liquidity, and financial stability.
- Shifting the balance of power and influence in the world. As countries reduce their dependence on the US dollar and its associated institutions, they will also reduce their dependence on the US leadership and influence in the world. This could lead to a more multipolar and competitive world order, where different countries or regions will have different interests and agendas.
How to prepare for de-dollarization?
De-dollarization is a gradual and complex process that will take years to unfold. However, it is important to be aware of its trends and implications, and to prepare accordingly. Some possible ways to do so are:
- Diversifying your portfolio across different currencies and assets. By holding a mix of different currencies and assets, such as gold, cryptocurrencies, or SDRs, you can hedge against the risk of dollar depreciation and inflation, as well as benefit from the opportunities offered by other markets.
- Educating yourself about different payment systems or platforms. By learning about different payment systems or platforms that bypass the US dollar and its associated institutions, such as SWIFT alternatives or digital currencies issued by central banks or private entities (CBDCs), you can access new markets and services that may offer more efficiency or security.
- Keeping an open mind about different perspectives and scenarios. By being open-minded about different perspectives and scenarios that may emerge from de-dollarization, you can avoid being biased or complacent about your own views or expectations. You can also be more flexible and adaptable to changing circumstances.
De-dollarization is a reality that cannot be ignored or denied. It is a challenge for some countries but an opportunity for others. It is also a chance for individuals to rethink their financial strategies and choices in a changing world.