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The simmering de-dollarisation...


The culmination of World War II prompted the US dollar to dominate the financial world for over 80 years, but now another war in the backyard of Europe has applied a reverse gear to this phenomenon – de-dollarisation.

When the Americans imposed a cascade of sanctions against Russia last year they were expecting that the Russian economy to be squeezed to the point of surrender. However, the financial sanctions against Russia, billed as the "weaponisation" of the dollar, resulted in a different outcome – the rise of alternative financial infrastructures promoted by the US's two most significant geopolitical competitors, China and Russia.

In response to these measures, these nations have moved to develop their own financial systems, which could potentially diminish the dollars' global financial dominance. The movement towards de-dollarisation is by no means confined to Russia and China alone. Rather, it is a global trend, with nations and regions from India to Argentina, Brazil to South Africa, and the Middle East to Southeast Asia all redoubling their efforts to reduce their reliance on the dollar.

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At the core of this drive towards financial independence lies a deep-seated fear among many countries: that the United States may one day use the full weight of its currency to target them with the same devastating sanctions that have been imposed on Russia.

The recent surge in de-dollarisation initiatives can be traced back to this growing anxiety, as countries seek to protect their economic interests and safeguard against potential future threats.

From the collapse of the Bretton Woods system to the launch of the euro by the European Union in 1999, and from the aftermath of the 2008-2009 financial crisis to the present day, questions about the dollar's weakening hold on the global economy have persisted.

Today, the world's central banks fell below 59 per cent of their foreign exchange reserves in dollars in the final quarter of last year - a decline from 70 per cent in 2000 - depicting the simmering trend towards de-dollarisation. During the same period, the euro has registered only a modest increase in its share of global reserves, rising from 18 per cent to just under 20 per cent today. In contrast, the Chinese renminbi (RMB/yuan), despite accounting for less than 3 per cent of the world's reserve currency holdings, has been showing very rapid growth since 2016.

The impact of US-led economic sanctions has been felt by a significant portion of the global population. For many, the consequences of these sanctions have been severe, limiting their ability to engage in essential economic and financial activities that are often priced in dollars.

In response, there has been a growing movement towards de-dollarisation, as countries seek to reduce their exposure to the vagaries of US foreign policy and safeguard against the impact of sanctions. The rapid appreciation of the dollar in recent years has had far-reaching implications for countries around the world.

One significant impact has been on dollar-denominated debt, which has become considerably more expensive to repay as the currency has surged in value. The dollar's value has fluctuated significantly in recent years, with the currency currently standing at over 10 per cent higher than its value at the start of the Ukraine conflict in February 2022, and a whopping 30 per cent higher than a decade ago.

In the quest for financial independence, many smaller economies have grown increasingly wary of their exposure to dollar-denominated debt. This, coupled with a push to strengthen regional trade ties, has spurred many countries to seek alternatives to the dollar.

The rise in the dollar's value has also translated into a sharp increase in import bills for essential commodities such as fuel and food. This has been a particular concern for nations that rely heavily on imports from other countries, as the cost of these goods can quickly become prohibitive in the face of a strong dollar.

Egypt provides a compelling example of the challenges faced by countries burdened by dollar-denominated debt. In recent years, the country has been forced to take on ever-increasing levels of borrowing in order to stabilise its economy and prop up the value of its currency, the Egyptian pound. However, this strategy has come at a significant cost, with the country's sovereign debt soaring by a factor of four over the past decade.

The challenges faced by Egypt are emblematic of the broader challenges faced by many countries around the world, as they seek to navigate an increasingly complex and interconnected economic landscape. Same is the case with many other countries who are being excessively burdened because their currencies are pegged with the dollars. As nations grapple with the impact of sanctions, shifting trade patterns, and volatile currency markets, the move towards de-dollarisation represents a critical response to these challenges, offering a way to safeguard against the uncertainties of the global economy and chart a course towards greater stability and prosperity.

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