The Dollar’s Dominance is Coming to an End: What Does “De-dollarization” Mean?

The idea of “de-dollarization” has existed for at least 20 years. Countries have always tried to reduce their dependence on the dollar, but these calls increased in 2023.

Dollarization is countries’ dependence on the US dollar in their local and global transactions in buying, selling, and trading instead of or beside their local currency.

The Dollar’s Strength is Declining!
The dollar’s share of global foreign exchange reserve currencies has gradually declined to a 20-year low of 58% in the last quarter of 2022 as central banks diversify the sources of their foreign reserves, according to IMF.

The dollar’s share was about 71% in 2001 (and peaked at 85.6% in 1971 before the Nixon shock, where dollar convertibility to gold ended).

The US dollar has long dominated the global trade and finance systems. It is the primary medium for buying and selling goods and services and estimating their value, in addition to being a safe-haven for foreign exchange reserves for financial institutions, companies, and countries worldwide.

Why are Countries Considering Abandoning the US Dollar?
Recent geopolitical tensions, rivalry with China, consequences from Russia’s war in Ukraine, and debate over the US debt ceiling raised concerns over the dollar’s strength as the dominant currency.

Calls for “de-dollarization” and the de-linking economies from the dollar increased. Many countries are now looking for alternatives to the dollar to reduce their dependence on the United States.

Among the reasons that accelerated moving away from the US dollar are the fears of economies over US domination of the global financial system and using its currency as a weapon in sanctions, and putting pressure on countries. Just as the US imposed economic sanctions on Russia in response to its invasion of Ukraine.

In addition, the US could control the prices of commodities such as oil or impose restrictions on the trade of some raw materials and metals, allowing it to block the producing countries from accessing markets from Russia to Venezuela and Iran.

A new system could be born and other alternatives!

From here, more and more countries – from Brazil to Southeast Asian countries – began to call for separation from the dollar and carrying out trade transactions in other currencies besides the dollar.

For example, India buys Russian oil with UAE dirhams and Russian rubles. China used its currency, the yuan, to buy $88 billion worth of Russian oil, coal, and minerals. China’s national oil company, CNOOC, and France’s TotalEnergies completed the first yuan-settled LNG trade.

Exaggerated Fears: Replacing US Dollars Won’t Be Easy!

Replacing the dollar as the world’s strongest reserve currency may take more than that. The dollar was and still is the king of world trade.

It is the main currency in oil pricing, an essential commodity that all economies, large and small, need. Most commodities are priced and traded in dollars.

According to the Federal Reserve, from 1999 to 2019, the dollar comprised 96% of trade bills in the Americas, 74% in the Asia-Pacific region, and 79% in the rest of the world. The only exception was Europe, where the euro is the dominant currency.

The dollar remains the world’s dominant medium of exchange and the world’s primary unit of account. It is still widely regarded as the best “store of value.”

There’s no currently competitive alternative currency. The euro, the closest competitor to the dollar, ranks second in global foreign exchange reserves with only 20%.

Finally, while there may not be a single successor to the dollar, the diversified alternatives may create a multipolar world.