The king of currency, the dollar, is on shaky ground. In this past one year, there’s a growing trend of countries sidestepping the US dollar and choosing to use their own local currencies for bilateral trade.

The de-dollarisation process – moving away from trading in the dollar and instead choosing local currency – has received a boost after the Russia-Ukraine war and as Washington’s tensions with Beijing rise even further.

In South America, China’s yuan has made greater inroads. After Brazil agreed to trade with China in the local currency, Argentina, on Wednesday, too agreed to the same. The South American country announced that it would pay for Chinese imports in yuan rather than dollars, in a measure to save the country’s dwindling dollar reserves.

As per a Reuters report, Buenos Aires said that it aims to pay $1 billion of Chinese imports in yuan instead of dollars and thereafter around $790 million of monthly imports will be paid in yuan.

As an increasing number of countries move away from the dollar, let’s take a better look at what exactly is de-dollarisation, which countries are practising it and is it a viable strategy.

De-dollarisation explained

Before we delve into de-dollarisation, one has to understand how the dollar became the acknowledged currency for international trade.

After World War II, the US dollar replaced the British pound as the dominating currency worldwide. In 1944, the Bretton Woods Agreement established the dollar as the world’s reserve currency. The original Bretton Woods Agreement is dead, but the dollar remains the international reserve currency.

This means that contracts for commodities like crude oil and natural gas are almost always priced in dollars. This, in turn, gives Washington economic powers beyond belief. It is because of the dominance of the dollar, or greenback as it is called, that Washington has been able to freeze half of Russia’s foreign currency reserves and also ban it banks from the SWIFT payment system in the aftermath of Vladimir Putin’s invasion of Ukraine in February 2022.

Now, de-dollarisation is the process of reducing dependency on the dollar and effectively weakening US’ global position. Several countries are undertaking this process because they would like to call a halt to dollar hegemony. They believe that the dollar has long given Washington a disproportionate amount of influence over other economies and they would like to put a stop to it.

If you still don’t understand de-dollarisation, an influencer on TikTok has explained it, using the famous movie Mean Girls as a reference.

Countries wanting to unseat the dollar

While de-dollarisation has picked up pace in recent times, it is not a new trend. There are several countries that have been calling for reducing reliance on US dollar for decades.

The greenback has been facing competition for long. In fact, in 2011, Japan and China agreed to dump the dollar and trade with their respective currencies.

China and Russia in recent times have pushed more aggressively to unseat the dollar. Both countries, which are perceived as anti-US, are trading in their local currency with one another. When Chinese President Xi Jinping visited Moscow in March, his Russian counterpart Vladimir Putin revealed that two-thirds of the countries’ bilateral trade is already conducted in the rouble and renminbi.

“It is important that our national currencies are increasingly used in bilateral trade“, Putin said. “We should continue promoting settlements in national currencies, and expand the reciprocal presence of financial and banking structures in our countries’ markets”.

Also read: Xi Jinping in Moscow: Will Chinese president convince 'good old friend' Vladimir Putin to end war in Ukraine?

The Russian leader added, “We support using Chinese yuan in transactions between the Russian Federation and its partners in Asia, Africa and Latin America”.

A week after Xi Jinping visited Russia, China announced that it used yuan to buy liquefied natural gas (LNG) from the UAE.

Also read: Petrodollar vs Petroyuan: Can China overthrow US in the global oil market?

Earlier in the month, Brazil president Luiz Inacio Lula da Silva also took aim at the dollar. Speaking during his visit to China, the veteran leader said, “Why should every country have to be tied to the dollar for trade? Who decided the dollar would be the (world's) currency?”

Interestingly, Brazil and China trade in the yuan and it was just reported that the yuan had surpassed the euro to become Brazil’s second-largest international reserve currency after the US dollar.

A Bloomberg report dated on 26 April stated that China’s slow move away from the dollar had reached a milestone. The yuan usage in its cross-border transactions had jumped ahead of the dollar for the first time in March.

But it’s not just Russia and China that are steering clear of the dollar. Iran, which is sanctioned by the US, is also carrying out trade with Russia and China in the local currency. Saudi Arabia, one of the biggest exporters of crude is also mulling trade with China in yuan.

It has also been reported that the BRICS collective (Brazil, Russia, India, China and South Africa) is working on a creating a new currency to facilitate trade. The new financial agreement could be seen as soon as in August when the countries meet for their annual summit in South Africa. Alexander Babakov, the deputy chairman of the State Duma, was then quoted as saying that the BRICS nations are in the process of creating a new medium for payments — established on a strategy that “does not defend the dollar or euro”.

Countries in Southeast Asia are also de-dollarising. India has been slowly moving away from the dollar. Just recently, Bangladesh became the 19th country to agree to bilateral trade in Indian rupees. Other countries that have agreed to trade with India in rupee is Russia, Singapore, Sri Lanka, Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Seychelles, Tanzania, Uganda and the United Kingdom.

The ASEAN collective is also trying to reduce dependence on the US Dollar, Euro, Yen, and British Pound from financial transactions and move to settlements in local currencies.

Malaysia is also advocating de-dollarisation. Prime Minister Anwar Ibrahim met with China’s Xi Jinping on 31 March and it’s reported that the two discussed plans to create an ‘Asian Monetary Fund’ and weaken the US dollar hegemony. A Bloomberg report quoted Malaysia’s prime minister Anwar Ibrahim as saying, “There is no reason for Malaysia to continue depending on the dollar.”

Even countries in the African continent are dedollarising. Kenya has signed an agreement with Saudi Arabia and the UAE to buy oil in March, using the shilling – the country’s local currency. This is because Kenya’s dollar reserves are running low.

As the Financial Times acknowledged in a March report that these were historic developments and part of a transition to a “multipolar currency world“.The chair of the Financial Times’ editorial board and US editor-at-large, Gillian Tett, wrote that “US banking turmoil, inflation and looming debt ceiling battle is making dollar-based assets less attractive”.

Challenges to de-dollarisation

But even as countries move away from the dollar, the US currency isn’t going away any time soon. As the recent International Monetary Fund report stated that the dollar still plays “an outsized role” in global markets despite the US economy representing a shrinking share of global output over the last two decades.

Moreover, it doesn’t seem to be a longterm viable option. The American Institute of Economic Research said this strategy is not foolproof. Moving away from an established currency like dollar will impact a country’s networking effect and create substantial barriers.

India’s very own Kumar Vivek, deputy commissioner at the ministry of finance, also said that there are challenges to overcome to move away from the dollar. He said policymakers must be vigilant and take appropriate measures to safeguard financial stability.

Secondly, to replace the dollar with another currency, it needs to have a certain degree of stability, liquidity, and acceptability. Currently, no single currency fully meets these criteria, although the euro and the Chinese yuan have made strides in this regard.

Last but not the least de-dollarisation could result in increased volatility in currency exchange rates, particularly during the initial phases of transition. Exchange rate fluctuations could impact trade, investment, and capital flows, particularly for countries with less developed financial markets or limited policy tools to manage exchange rate volatility

Also, the most pertinent question that remain in the de-dollarisation debate is which currency replaces the US dollar. Will it be the yen, the euro or even the rupee? That, we think, only time will tell.

With inputs from agencies

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