Never have I ever scrolled through social media and drowned in the temptation of the latest international products—The Rhode phone case, Dyson Hair Dryers, or The PS5. Most of us have been there, raising our hands in guilty agreement.
But then the bomb drops, that price tag staring at us in foreign currencies through the screens; those items feel out of reach. WHY? Have you seen those massive dollar signs with intimidating exchange rates? Whether it's the PS5 or Korean skin care, all currencies have to be converted in dollars. But why is the dollar the global exchange standard?
The reason dates all the way back to 1944, with the Bretton Woods Agreement, where 44 nations pegged their currencies to the U.S. dollar, backed by gold. Since then, the dollar has solidified its power as the world’s reserve currency, supported by the U.S.’s large, liquid financial markets, making it easy to trade and invest in.
But why has all the power presented to the U.S. on a silver platter? Are all the countries affected by the U.S. economic policies? And many more questions that will help us understand why dependence on the dollar is detrimental.
Why is dependence on the dollar detrimental?
In today's world, dependency on the dollar has made the US hold a leash over other countries. They can function on their own, but within the control of that leash. This socioeconomic and political dependance on the US is making countries vulnerable to its decisions and at the mercy of fluctuating exchange rates.
Fluctuations in U.S. interest rates, too, can directly impact trade. When rates rise, the dollar strengthens; it’s like putting the dollar into overdrive, making imports more expensive, and suddenly all the financial goals of the countries seem to slip away further. On the flip side, if the dollar strengthens too much, a country's exports become too costly, slowing its growth. This dependence leaves nations at the mercy of U.S. decisions.
This control solidifies the debt trap that countries bow in front of, as countries have the majority of their dealings with the US that make them stuck in a cycle where their anatomy to grow is constantly within bounds. The dollar’s dominance stifles economic independence, forcing countries into unbalanced trade relationships.
The U.S.'s frequent use of the dollar as a geopolitical, social, and economic weapon has pushed other countries to seek greater financial autonomy. Now let's see: Which countries are the frontrunners in this effort?
Which countries are the frontrunners in this effort?
While dedollarization is gaining momentum as a global phenomenon, the dollar is still far from threatened. The US is going through major political and socioeconomic ordeals and rivals will try to capitalize on this situation by trying to deal a blow to the standing of the dollar
The major world powers taking lead in this endeavor are:
EU: The US’s neighbours across the pond are also looking to wave goodbye to the Days of Dollar supremacy and have recently started to take steps towards that vision. After the US withdrew from the Iran nuclear deal and put secondary sanctions on European countries, in retaliation the EU launched INSTEX (Instrument in Support of Trade Exchanges), a barter-like system to facilitate trade without involving dollars, which allowed it to trade with Iran bypassing the sanctions. The EU has also been steadily developing SEPA (Single Euro Payments Area) and other mechanisms to strengthen Euro-based transactions.
China: China has been playing economic second fiddle to the US for a long time and has plenty of reasons to move away from its dependency on the dollar and has been steadily implementing policies and trade agreements to bypass the dollar. Initiatives like the Belt and Road Initiative and the Cross-Border InterBank Payment System (CIPS). These are working to strengthen China’s Global economic influence and facilitate more Yuan Transactions
Russia: You can bet your life savings that if there is an effort to take shots at the US, Russia would be first in line. Russia is no stranger to challenging the US and its power. Especially after being sanctioned for invading Ukraine in 2022, Russia has sold US dollar assets and started stocking up on gold and other currencies. It has also introduced a “Gas for Rubles” policy where Russia can leverage its status as the second-biggest natural gas supplier to force not-so-friendly nations to trade in rubles. It also created the System for Transfer of Financial Messages (STFS) to reduce dependence on The SWIFT System and also frequently relies on China’s CIPS System
Brazil: Brazil has followed suit and has started implementing several policies and schemes and has actively encouraged the use of local currencies in bilateral trade with key partners. Brazil set up its first Yuan clearing bank in 2023, which strengthened its trade relations with its biggest trade partner, China.
India: Not wanting to be left out of the party, India has also taken steps to try and phase out its dependence on the dollar. RBI implemented a new framework in July 2022 that allows invoicing, payment, and settlement of trade transactions in the INR. India has started trading with Russia, Saudi Arabia, and the UAE in INR or their respective local currencies, further reducing its dependence on the dollar.
As evident from the above-listed countries, BRICS as an organization is leading the pack, with the EU and ASEAN following in the effort, but is it even possible?
Is it even possible?
As cliche as it sounds Nothing is impossible. When the United Kingdom’s Pound Sterling was the standard reserve currency during the height of the British Empire, people thought it would stay that way forever, but for better or for worse, things tend to change.
Just like the geological or biological worlds, the economic world has evolved through different phases and will continue to do so. The dollar has stood strong for many many years, but its identity as the reserve currency will surely be under threat in the coming years.
Thus the looming question is not if the dollar will fall, but rather when will the dollar fall, and most importantly of all, what will replace the dollar?
What will replace the dollar?
As well established from everything written above, the dollar will not constitute the top order forever, but what will take its place is up for debate.
The Euro is a strong contender as the second most held reserve currency after the dollar and is almost as prominent in terms of reputation and history. The Chinese Yuan is not a half-bad choice either, considering China and its allies constitute a massive chunk of global trade. But maybe the dollar cannot be dethroned by one single currency. Enter composite currencies like DEY (Dollar Euro) or TERRA, which are hypothetical global currencies or supercurrencies. Terra is the name of the currency popularized by Belgian economist Bernard Lietaer. Terra is meant to be based on a collection of 9–12 of the most important commodities in the world. This would make Terra completely immune to inflation, but alas, it’s just a hypothesis, probably never to be put into practice.
BRICS has also been talking of developing its own currency, which could potentially take the dollar’s spot, but has nothing concrete to show of it as of now.
Death to the dollar?
After all you've read, you must have a new perception of the dollar, and it's most probably a negative one, but you must ask yourself a question: is the dollar really the source of the problems we discussed, or do they arise from the faulty system that the dollar wholeheartedly takes advantage of? Is there any guarantee that whatever currency replaces the dollar will not just lead to the same situation all over again? Or at the end of the day, we’ll all just be saying, The King is dead. Long live the King.
Author: Ayushman Roy & Shivangi Batra
Illustration: Tanishka Kansal
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