We are witnessing an unprecedented polycentric trend in Global Economics where the international system of transactions is becoming Multipolar .The De Dollarization is happening in the form of Currency Swap Agreements , Trade in National Currencies without Dollar, Oil and Natural Gas trading in national currencies . The Setting up of Special accounts for internationalizing national currencies and setting up of international financial system.
The Emergence of China as Worlds Largest Economy and steep decline of Dollar Reserves in Global Market Share
China has emerged as the Worlds largest Trading Partner , leaving Behind US and. Market Share of the US Dollar Forex Reserves have fallen to one of the lowest levels of 58% in 2021. USD achieved its highest share of 85.6% during 1971 when Dollar Convertibility into Gold was suspended.
Gold is Outshining Dollar in Global Reserves Faster Than Anticipated
The Central Banks all around the world are stocking up Gold Reserves more as compared to Dollar. More than 1123 tones of Gold have been added by Central Banks in 2022 which highest sticking since 1950. They consider Gold as more stable and safe reserves as compared to Dollar. This is basically because of reckless money printing and excessive tightening of interest by US Fed Reserve which has de stabilized Global Economies.
Cross Border Trade and Investments in Own Currencies and Different International Settlement System
Many Countries have started adopting to trading and transactions with other Countries in their Own Currencies and also making an international settlement system for smooth transactions.
Reasons behind Weakening of Dollar and Diminishing faith of Global Banks in USD
Reckless Monetary Policies of US – US takes undue advantage of Global Dollar Dominance .The Profligate Money Printing over the last 3 Years post Covid-19 Pandemic. It has disregarded the negative spillovers to other global economies the money printing has done.
Monetary Tightening by US Federal Reserve – The excessive monetary tightening of interests rates by FED made USD strong and it has serious ripple effects globally . The record inflation is globally an issue in many countries . It resulted in high foreign debt which is dollar denominated. Emerging economies had to fight off capital outflows and currency depreciation.
Increased Weaponization of Currency Reserves
The increased Weaponization of currency reserves by US is leading other countries to rethink about USD Reserves . The unrelenting use of monetary sanctions in the form of freezing of USD Reserves of Russia is a recent example. Even the friendly allies have started thinking about alternatives to USD.
No Worthy Challengers to USD Dominance in the Near Future
Easy Convertibility of USD
Nowhere else can you find an economy with the sheer size and stability of the US combined with the dollar’s unrestricted convertibility. Although the Chinese Yuan has the economic strength to support its throne claim, stringent capital controls thwart its aspirations for worldwide dominance.
The EURO Currency in Comparison to USD
The Euro offers easy conversion to dollars but is constrained by the European Union’s unstable political and economic foundation. Additionally, the US has the largest and most liquid financial market in the world, enhancing its standing as the owner of the reserve currency.
The Inconvenience Associated with Other Currencies and International Settlement System.
The greatest open economy and one with a strong, well-managed financial system support the dollar. Additionally, switching to alternate arrangements is inconvenient, which is a strong barrier. Any developing nation making the switch away from the US currency risks experiencing increased exchange rate volatility, which would be detrimental to trade, investment, and capital flows. “So long as the US has the largest open trading economy, so long as everyone wants access to the US economy.
IS USD Infallible?
Strong currencies can and do fall, but a significant trigger is required. An important political or economic event that causes domestic economic instability. Before World War-I decimated the local economy and its currency, the British pound was the standard currency for the entire planet. As a result, the US dollar gained global sway, a position it strengthened in the years following World War II. To bring the dollar to its knees, a similar catastrophic catastrophe or significant domestic instability are required.
Recent Developments in De Dollarization Across the Globe
Petroleum and Natural gas Deal Between China and Saudi Arabia
China and Saudi Arabia announced a new collaboration deal in December 2022, with all future energy imports being paid for in yuan. Saudi Arabia declared it is willing to trade its oil supply in currencies other than the US dollar for the first time in decades.
IRAN and Russia New Inter bank Messaging System Replacing SWIFT
Iran and Russia decided to connect their interbank messaging systems in January 2023, bypassing the SWIFT banking communication and transfer system that is denominated in US dollars. A single currency for trade was proposed by Argentina and Brazil.
Bilateral Trade In Local Currency Between China and Brazil
China, the second-largest economy in the world, and Brazil, the largest economy in Latin America, declared in March that they would conduct bilateral trade in local currencies rather than using the dollar.
Bilateral Trade Between India and Malaysia
India and Malaysia decided to settle their trade in Indian rupees in April. India already compensates Russia in rubles for crude and defense hardware and pays Iran in rupees for crude.
Future Outlook of USD
Any foreign investments may be impacted by sharp currency swings. Be ready for higher return volatility if you have dollar-denominated investments in the form of overseas equity funds. Due to US financial issues and the potential for rate reduction by the Federal Reserve in the upcoming year, the dollar has been trading more negatively. Even a falling currency could cause some of the rewards to be reduced. The value of investments kept in dollars will decrease if the value of the dollar declines, according to Shah. However, this does not always make it less compelling to include US-focused funds in your portfolio. Investors continue to have access to high-growth, creative companies with global reach in the US. After creating an acceptable allocation to other options, investors can only do so.
Investors continue to have access to high-growth, creative companies with global reach in the US. Investors can look at other options after creating a sufficient allocation to the US market. In Shah’s opinion, there is no better option than US dedicated funds to achieve global diversification in the portfolio. Mehta urges investors to place more emphasis on gold as a risk reducer and diversifier, though.
