As countries around the world continue to explore alternatives to the US dollar, new data suggests that DeDollarization is not an entirely surprising phenomenon.
The dollar’s rise to prominence took several decades, with its influence in the global economy beginning to decline as early as the 1970s.
Meanwhile, the BRICS nations (Brazil, Russia, India, China, and South Africa) have been working to establish a new common currency to reduce their reliance on the dollar, and other countries are also exploring the use of local currencies in international trade.
The rise and fall of the US dollar
The US dollar’s ascent to the top of the global economic ladder was not an overnight occurrence. It first gained prominence in the 1920s, lost ground to the British pound during the Great Depression, and eventually took over as the leading international currency following World War II.
The growth of the US economy, the development of US financial markets, and the nation’s involvement in both world wars all played a significant role in the dollar’s rise. The gold standard also presented challenges to countries attempting to maintain it in the face of economic shocks.
However, the dollar’s position began to erode in the 1970s when the US experienced a persistent balance of payments deficit. As the US continues to weaponize the dollar through economic sanctions, countries are seeking alternatives, from creating new common currencies to using local currencies in trade.
Indonesia and the push for DeDollarization
Indonesia is following the lead of the BRICS nations in DeDollarization, shifting away from the US dollar in trade settlements and financial transactions, according to the country’s central bank governor, Perry Warjiyo.
He confirmed that Indonesia has implemented the local currency trade (LCT) system, which is more concrete than the BRICS’ approach to DeDollarization, as the country has already established currency diversification agreements with several nations, including Thailand, Malaysia, China, and Japan.
The Indonesian government also plans to sign an agreement with South Korea regarding local currency transactions in early May.
The US dollar remains dominant in global forex reserves, although its share in central banks’ foreign exchange reserves has dropped from more than 70% in 1999 to 58.36% in the fourth quarter of last year, according to IMF data.
The Euro is the second most prominent currency, accounting for about 20.5% of global forex reserves, while the Chinese yuan accounted for just 2.7% during the same period.
Growing calls for alternatives to the US Dollar
China, the world’s second-largest economy, is one of the most active players in the push for DeDollarization. Based on IMF data on 2022 direction of trade, mainland China was the largest trading partner to 61 countries, while the US was the largest trading partner to 30 countries.
China has also been steadily reducing its holdings of US Treasury securities, with mainland China holding nearly $849 billion of US Treasuries as of February this year, a 12-year low.
Brazil, another major player in the push for DeDollarization, saw trade between itself and China reach $150 billion in 2022, a 10% increase from the previous year.
During a recent visit to China, Malaysia’s Prime Minister Anwar Ibrahim suggested the establishment of an “Asian Monetary Fund” to reduce reliance on the US dollar.
