BTL 774 - De-Dollarization

 

The Banking Tutor’s Lessons

BTL 774                                                                          18-04-2025

De-Dollarization

 

The U.S. dollar is the world’s primary reserve currency, and it is also the most widely used currency for trade and other international transactions. However, its hegemony has come into question in recent times due to geopolitical and geostrategic shifts.

 

De-dollarization is an effort by a growing number of countries to reduce the role of the U.S. dollar in international trade.

 

Countries like Russia, India, China, Brazil and Malaysia, among others, want to set up trade channels using currencies other than the almighty dollar.

 

De-dollarization entails a significant reduction in the use of dollars in world trade and financial transactions, decreasing national, institutional and corporate demand for the greenback (dollar). This would diminish the dominance of the dollar-denominated global capital markets, in which borrowers and lenders around the world transact in dollars.

 

Fundamentally, de-dollarization would shift the balance of power among countries, and this could, in turn, reshape the global economy and markets.

The impact would be most acutely felt in the U.S., where de-dollarization would likely lead to a broad depreciation and underperformance of U.S. financial assets versus the rest of the world.

 

However, the effect of de-dollarization on U.S. growth is uncertain. While a structurally depressed dollar could raise U.S. competitiveness, it could also directly lower foreign investment in the U.S. economy. In addition, a weakening dollar could in principle create inflationary pressure in the U.S. by raising the cost of imported goods and services, though benchmark estimates suggest these effects may be relatively small.

 

 

Sekhar Pariti

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