Dismantling US $ Dominance: De-Dollarization Strategies

Candauda Arachchige Saliya

Department of Business Management, SLIIT Business School,

Sri Lanka Institute of Information Technology, Malabe, Sri Lanka.
Telephone: +94 11 7544642; Mobile: +94701649443
Emil: saliya.a@sliit.lk; saliya.ca@gmail.com
ORCID: https://orcid.org/0000-0002-9239-1648

Abstract

This study delves into the impact of the "US dollar trap" on poor, developing, and emerging
economies, focusing on financial stability, dollarization, and constrained monetary policies.
A stronger dollar adversely affects trade and finance in emerging markets, resulting in a
decline in real trade volumes. The global reserve currency status of the US dollar raises
concerns among strategic competitors, potentially challenging US hegemony in the global
financial system. Despite claims of instability, the dollar's dominance has provided
substantial benefits to the US economy since the 1960s.
The analysis compares the dollar's strength to a basket of currencies, revealing a two-decade
peak. Recent geopolitical events, including the Russia-Ukraine crisis, prompt a
reconsideration of global reliance on the US dollar. Instances like Bolivia's adoption of the
Chinese currency (renminbi-RMB) and Brazil's collaboration with China exemplify a trend
toward reducing dependence on the dollar.
Exploring de-dollarization dynamics, especially within the expanded BRICS group,
challenges to dollar hegemony may arise from events undermining its perceived safety or
positive developments enhancing alternative currencies' credibility. The repercussions of de-
dollarization could impact US financial assets and global economic dynamics, with uncertain
effects on competitiveness, foreign investment, and inflation.
While signs of de-dollarization emerge, the US dollar maintains influence, particularly in
currency markets (88% of foreign exchange volumes). De-dollarization is observable in oil
markets, with an increasing number of transactions occurring in non-dollar currencies.
Expectations suggest a plausible scenario of partial de-dollarization, with the renminbi
assuming some traditional dollar functions, potentially leading to regionalism. The study
acknowledges the enduring global network of alliances and partner ships as a significant
factor contributing to the US dollar's continued prominence amid the evolving international
currency landscape.
Keywords: Global Reserve Currency, Emerging Economies, Financial Stability, Monetary
Policy, Geopolitical Events, Oil Markets, Foreign Exchange Reserves, US Dollar Hegemony
JEL Codes: F33, G15, E42, E52, O24, P16
 Dismantling US $ Dominance: De-Dollarization Strategies

Introduction
The dominance of the US dollar as the primary international currency, often referred to as
the "US dollar trap," has far-reaching implications for poor, developing, and emerging
economies. This study delves into the multifaceted consequences of the dollar' s supremacy,
exploring its impact on financial stability, dollarization, and the constraints it imposes on
monetary policies. The stronger dollar negatively influences trade and finance in emerging
markets, resulting in a decline in real trade volumes. Furthermore, the dollar's global reserve
currency status raises concerns among strategic competitors, potentially posing a challenge
to US hegemony in the global financial system. Despite occasional claims of instability, the
dollar's pivotal role has provided substantial benefits to the US economy since the 1960s.
Recent developments, particularly the Russia-Ukraine crisis and subsequent US sanctions on
Russia, have initiated a reevaluation of the global reliance on the US dollar. Notable instances,
such as Bolivia's adoption of the Chinese currency (renminbi-RMB) and the initiation of yuan
settlements by Argentina and Brazil, underscore a growing trend aimed at reducing
dependence on the dollar in international transactions. The expansion of the BRICS group,
with the inclusion of six new members, signifies concerted efforts to diversify financial
interactions and challenges to the existing financial order.
This study examines the primary method of assessing the strength of the dollar by comparing
it to a basket of currencies from major trading partners, revealing its two-decade peak. The
robustness of the dollar, while beneficial to the US economy, has led to a reconsideration of
its long-standing dominance. The impact of de-dollarization could unfold through events
undermining the perceived safety and stability of the US dollar or positive developments
enhancing the credibility of alternative currencies. The repercussions of de-dollarization
may extend to a broad depreciation of US financial assets, prompting shifts in global
economic dynamics, with uncertain effects on competitiveness, foreign investment, and
inflation.
While signs of de-dollarization are becoming evident, the US dollar continues to exert
influence in various markets. Efforts by China to internationalize the renminbi are
characterized by a gradual process, involving measures such as relaxing capital controls,
opening markets, and promoting Chinese government bonds to position the renminbi as a
credible alternative. Despite this, the dollar maintains a substantial share in currency
markets, accounting for 88% of foreign exchange volumes. However, foreign exchange
reserves indicate a decline to a record low of 58%, signaling a notable shift away from the
dollar.
De-dollarization is notably observable in oil markets, where the US dollar's influence on oil
prices is diminishing. An increasing number of oil transactions occur in non-dollar
currencies, particularly the renminbi, showcasing a trend where countries, including Russia,
opt to sell oil in local currencies or those of allied nations. The significance of the dollar in
determining oil prices has diminished, with OECD oil inventories playing a more dominant
role.
As expectations suggest a plausible scenario of partial de-dollarization, where the renminbi
assumes some functions traditionally associated with the dollar, this shift could lead to
regionalism. This may create distinct economic and financial spheres of influence
characterized by different currencies and markets. Despite these evolving dynamics, the US
dollar's enduring global network of alliances and partnerships remains a significant factor
contributing to its continued prominence amid the changing landscape of international
currencies.
I conducted desk research utilizing Saliya's flexible integrated methodology (Saliya, 2023)
for social science research. The study is completed using the various analytical tools and
techniques recommended in the flexible integrated methodology (refer to Saliya, 2021a,
2021b, 2021c).
In conclusion, the dominance of the US dollar, encapsulated in the "US dollar trap," is a
complex phenomenon with both benefits and challenges. This study aims to unravel the
intricacies of its impact on global economies, examining the current landscape of de-
dollarization and its potential future implications.
Literature review, analysis, and discussion
The impact of the US dollar's dominance as the primary international currency, termed the
"US dollar trap," on poor, developing, and emerging economies. The consequences
encompass financial stability and dollarization, with monetary policy constrained by the
dollar's influence. A stronger dollar negatively affects trade and finance in emerging markets,
causing a decline in real trade volumes. The dollar's status as the global reserve currency
leads to dissatisfaction among strategic competitors, potentially challenging US hegemony in
the global financial system. Despite claims of instability, the dollar's global role has provided
substantial benefits to the US economy since the 1960s.
Source: https://www.nytimes.com/interactive/2022/07/16/business/strong-dollar.html

The primary method of assessing the strength of the dollar involves comparing it (indexing)
to a basket of currencies from significant trading partners, such as Japan and the eurozone.
By this standard, the dollar is currently at a two-decade peak, having surged by over 10
percent this year. This substantial movement is noteworthy for an index that generally
experiences minor fluctuations on a daily basis.
Transformation
The value of the U.S. dollar is the strongest it has been in a generation, devaluing currencies
around the world and unsettling the outlook for the global economy as it upends everything
from the cost of a vacation abroad to the profitability of multinational companies. However,
this U.S. dollar's long-standing dominance in the international arena is facing new challenges,
raising questions about the phenomenon of de-dollarization. Recent geopolitical events,
particularly the Russia-Ukraine crisis and the resultant U.S. sanctions on Russia, have
triggered a reconsideration of the global reliance on the U.S. dollar. Notable instances, such
as Bolivia's adoption of the Chinese currency known as renminbi-RMB, like sterling of Great
Britain (the currency unit is Yuan- Y, like British Pound, for example) for imports and exports,
highlight a growing trend toward reducing dependence on the dollar in international
transactions. Argentina and Brazil had already initiated the use of Yuan in their trading
settlements. Argentina in April 2023 announced plans to use Chinese currency to pay for
goods imported from China; while Brazil in February 2023 signed a memorandum of
cooperation with China to establish yuan clearing arrangements in Brazil. Meanwhile, State
Bank of India completes its first non-dollar transaction with Sri Lanka by paying Sri Lanka
Rupees for exports.
Renminbi Vs Yuan
Renminbi is the official currency of the People's Republic of China and means "people's
currency" in Mandarin. A yuan is a unit of the currency. A popular analogy draws from the
British pound sterling vs. the pound: renminbi is the name of China's currency, just
as sterling is the currency of Great Britain. A unit of renminbi is a yuan, just as the pound is
the basic unit of sterling.
Expansion of BRICS
This shift has been particularly noticeable within a group of influential emerging economies
collectively known as BRICS—Brazil, Russia, India, China, and South Africa. On Aug. 24, 2023,
BRICS announced that it would formally accept six new members at the start of 2024: Saudi
Arabia, Iran, Ethiopia, Egypt, Argentina, and the United Arab Emirates (UAE).

Source: https://www.visualcapitalist.com/visualizing-the-brics-expansion-in-4-charts/
Source: https://www.visualcapitalist.com/visualizing -the-brics-expansion-in-4-charts
Challenges to Dollar Hegemony
The impact of de-dollarization could unfold through two primary scenarios. Firstly, events
that undermine the perceived safety and stability of the U.S. dollar may contribute to its
erosion. Secondly, positive developments that enhance the credibility of alternative
currencies might further challenge the dollar's dominance. The repercussions of de -
dollarization could extend to a broad depreciation of U.S. financial assets, prompting shifts in
global economic dynamics. However, the precise impact on U.S. growth remains uncertain,
with potential effects on competitiveness, foreign investment, and inflation.
Emerging Signs and Scenarios
While signs of de-dollarization are becoming evident, the U.S. dollar continues to exert
influence in various markets. China's efforts to internationalize the renminbi are ongoing but
are characterized by a gradual process. Measures such as relaxing capital controls, opening
markets, and promoting Chinese government bonds aim to position the renminbi as a
credible alternative. In currency markets, the dollar maintains a substantial share,
accounting for 88% of foreign exchange volumes. However, foreign exchange reserves
indicate a decline to a record low of 58%, signaling a shift away from the dollar.
De-Dollarization in Oil Markets
Notably, de-dollarization is observable in oil markets, where the U.S. dollar's influence on oil
prices is waning. An increasing number of oil transactions occur in non-dollar currencies,
particularly the renminbi. Countries, including Russia, are opting to sell oil in local currencies
or those of allied nations. The significance of the dollar in determining oil prices has
diminished, with OECD oil inventories playing a more dominant role.
Expectations and Regional Shifts
While a complete and rapid de-dollarization is deemed unlikely, there is an expectation of
marginal de-dollarization. The more plausible scenario involves partial de-dollarization,
where the renminbi assumes some functions traditionally associated with the dollar. This
shift could lead to regionalism, creating distinct economic and financial spheres of influence
characterized by different currencies and markets. The U.S. dollar's enduring global network
of alliances and partnerships remains a significant factor contributing to its continued
prominence despite the evolving landscape of international currencies.
Conclusion
In conclusion, the dominance of the US dollar, known as the "US dollar trap," has profound
implications for poor, developing, and emerging economies. Despite providing significant
benefits to the US economy since the 1960s, recent geopolitical events, such as the Russia -
Ukraine crisis, have triggered a reassessment of global reliance on the dollar. Instances like
Bolivia's adoption of the Chinese currency and Argentina and Brazil's initiation of yuan
settlements indicate a growing trend to reduce dependence on the dollar. The expansion of
BRICS with 11 member nations reflects efforts to diversify financial interactions. Challenges
to dollar hegemony may arise from events undermining stability or positive developments
favoring alternative currencies. Signs of de-dollarization, particularly in oil markets, suggest
a shift toward regionalism with distinct economic spheres. Despite these shifts, the enduring
global network of alliances contributes to the continued prominence of the US dollar.
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