The call to move away from the United States dollar (USD) has been brought into focus once again after the Russian Federation announced in March this year that it will be making use of the Chinese Yuan in transactions with its trade partners in Asia, Africa and Latin America, effectively replacing the USD as the dominant international currency for global transactions.
India, Brazil, Argentina, Singapore, and the Middle East are included on the list of countries abandoning trade in USD for local currencies. For context, de-dollarisation refers to the process whereby countries reduce their reliance on the USD as a reserve currency, medium of exchange, and unit of account.
Accordingly, a shift towards de-dollarisation will have considerable implications on international trade, investment, and monetary policy, particularly for emerging economies. Firstly, emerging markets have shown strong economic growth over the years and have established their position as commensurate trading partners. Secondly, the US has sanctioned over 14 countries (13 out of the 14 countries are developing countries). These sanctions have handicapped these countries’ abilities to participate in necessary economic and financial activities that are critical for their functioning due to being priced in USD. It is against this background that de-dollarisation has become a point of focus amongst many heads of states.
De-dollarisation may present challenges and unintended costs for emerging economies. Firstly, countries moving away from the USD, may face heightened exchange rate volatility given that the USD displayed the highest level of stability compared to its counterparts. This could ultimately impact trade, investment activity and capital flows. Secondly, the strength of a currency is underpinned by deep and liquid domestic financial markets and a sound economic and political environment.
This could prove difficult for most emerging markets as they are fraught with political instability, economic turmoil and weak financial institutions. In the fullness of time, global acceptance of alternative currencies will likely continue to increase although amendments to existing trade and financial arrangements could prove to be prohibitively expensive.
Contrastingly, de-dollarisation can benefit emerging economies, by strengthening domestic currencies, reducing vulnerability to US sanctions and increasing sovereign and monetary policy independence. While de-dollarisation is possible for emerging economies, it will not be without challenges and will take time.
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