Financial term of the Week

DDe-dollarisation

E-DOLLARISATION is the process of reducing reliance on the US dollar as a reserve currency, medium of exchange or unit of account. The dollar has been the world’s dominant currency since the end of World War II, but there are a number of factors that could lead to de-dollarisation, including geopolitical tensions, economic uncertainty and the rise of alternative currencies.

In terms of geopolitical tensions, countries that are at odds with the United States may be more likely to reduce their reliance on the dollar, as they may be concerned about being subject to US sanctions or other financial penalties.

As for economic uncertainty, countries with weak economies or unstable currencies may be more likely to hold reserves in other currencies, such as gold or the euro, as a way of hedging against risk.

Lastly, the development of digital currencies, such as Bitcoin, could provide countries with an alternative to the dollar for international transactions. There are a number of ways that countries can de-dollarise. For example, they can invoice international trade in their own currencies. This would reduce the need to use dollars as a medium of exchange.

They can also develop their own financial markets. This would allow them to raise capital and conduct international transactions without relying on the US financial system.

There are a number of potential benefits to de-dollarisation. For example, it could give countries more economic and financial autonomy. It could also reduce their vulnerability to US sanctions and other financial penalties.

However, there are also some potential drawbacks to de-dollarisation. For example, it could make it more difficult for countries to access international capital markets and trade with other countries. It could also lead to increased volatility in exchange rates.

It is unclear how quickly or extensively de-dollarisation will occur. However, it is a trend that is worth monitoring, as it could have a significant impact on the global financial system. There are several examples of de-dollarisation.

In 2022, India and Russia signed a rupee-ruble trade deal, which is designed to reduce their reliance on the dollar. Russia and Iran have also been exploring ways of reducing their use of the dollar in bilateral trade.

Some central banks, such as China’s, have been increasing their holdings of gold and other currencies as a way of diversifying their reserves.

These are just a few examples, and it is likely that we will see more countries moving away from the dollar in the years to come.