US President Donald Trump claimed this week that BRICS (the bloc of nations started by Brazil, Russia, India, China, South Africa) is a threat to the dollar.
So today, let’s look at what de-dollarisation means, if it’s something that has started and what the impact of it could be
What does de-dollarisation mean?
For many decades, the US dollar has been dominant because the United States was a leading global economic power after World War II. De-dollarisation means reducing the world’s heavy reliance on the US dollar as the main currency for global trade, finance, and reserves. Countries use the dollar to buy and sell goods internationally, hold dollar assets as reserves, and conduct financial transactions. What’s changed recently though is that some countries and groups want to lessen this dependence to gain more control over their own economies and reduce risks from US policies. The share of the US dollar in global reserves has gradually declined from over 70 percent in 2001 to about 57 percent in 2024 in what is a clear sign that countries are looking at alternatives.
What can hurt the status of the dollar?
The short answer is anything that hurts the dollar’s reputation or the global standing of the United States could erode its status.
So political fighting or polarisation in the U.S. can make the government look unstable, which makes investors less confident in the dollar as a global safe haven.
Second, the ongoing U.S. tariff policies (taxes on imported goods) may be something President Trump is thrilled about but it could also cause international investors to lose faith in U.S. financial assets.
In short, if the world sees the U.S. as politically or economically less reliable, the dollar’s status as the world’s most trusted currency is at risk.
Why are some countries thinking about de-dollarisation?
The main reason for de-dollarisation is that the US dollar gives the United States great financial and political power. For example, the US government can impose sanctions on countries by restricting their access to the dollar-based global financial system, such as freezing assets or blocking transactions. This happened to Russia after its 2022 invasion of Ukraine when the West froze over $300 billion of Russian assets. Such actions make countries want to find alternatives to the dollar. When nations diversify their dependence solely on the dollar, what they are essentially aiming for is reducing geopolitical risks, strengthening regional currencies and mitigating exchange rate risks that are linked to the dollar. The increased global role of currencies like the Chinese Yuan encourages de-dollarisation by providing viable alternatives to the dollar.
How have countries tried to move away from the dollar?
After Russia was heavily sanctioned for invading Ukraine, Moscow created its own payment system called SPFS to replace the US-dominated SWIFT system for bank transfers. Nations don’t need to be sanctioned to explore options of using a currency other than the US dollar for payments. Take China, for example. China is promoting the ‘petro-yuan’ by introducing yuan-denominated oil contracts, aiming to challenge the petrodollar system.
Russia’s Deputy PM Alexander Novak said recently that India has started settling some payments for Russian oil in Chinese yuan, while most transactions still use roubles. As we know, the US slapped an additional 25 percent tariff on India for buying Russian oil. (effectively taking tariffs to 50 percent for products imported into the US.) India is trading oil with the United Arab Emirates in Indian rupees instead of dollars.
The BRICS countries have discussed the creation of a new currency backed by resources rather than gold or dollars even though no substantial move has been made to act on this.
Central banks of China, Russia, and India have increased their gold reserves as a safer asset than holding mostly US dollars.
De-dollarisation is a complex process and involves geopolitical and strategic objectives that also needs to map economic considerations. It involves updating financial systems, renegotiating trade agreements, and accepting new risks like currency fluctuations. But it also reflects a global shift toward a https://temi.esquel.org.ec/ multipolar economic order, where no single country controls worldwide finance as the US has for decades.
(Image AI Generated)