What is meant by Dedollarization?
Dedollarization is the process of reducing the use of the US dollar as a global currency and moving towards using other currencies or a basket of currencies. This shift aims to reduce the dependence on a single currency and promote economic stability and independence.
What happens in a Dedollarization?
In a Dedollarization process, countries may choose to adopt a different currency, or a basket of currencies, as their primary means of international transactions. This can include increased use of local currencies, regional currencies, or alternative reserve currencies. The process may also involve the implementation of policies aimed at reducing the use of the US dollar in the domestic economy.
Why is de Dollarisation imminent?
De dollarization is becoming increasingly imminent as countries seek to reduce their dependence on the US dollar and promote economic stability and independence. This is particularly true in light of recent economic and political events, such as the global financial crisis and tensions between major powers, which have highlighted the need for countries to diversify their currency holdings.
The US dollar’s status as the world’s major reserve currency is at risk as countries like China, Russia, and the European Union look to de-dollarize their economies. This shift is due to the fact that countries are wary of being subject to US jurisdiction when transacting in dollars. When the US dollar is used in transactions or cleared through American banks, entities become subject to US jurisdiction, even if they have no connection to the US.
The situation arose when Washington withdrew from the Iran nuclear deal in 2018 and restored sanctions on Tehran, putting European multinational companies at risk of punishment from Washington if they continued to do business with Iran. Europe has a strong motivation to shift away from the US dollar, as do many other countries that do not want to be subject to US law when doing business with countries that the US is not happy with.
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The ASEAN countries of Malaysia, Indonesia, Thailand, Singapore, and the Philippines are planning to end their reliance on the US dollar as an intra-trade currency. Payment systems in Malaysia, Indonesia, and Thailand have already been connected with one another, while Singapore has been linked to Thailand, and the network is being extended further.
By November, the five biggest economies in the region are scheduled to finalize a pact that would join their networks together, eliminating the need for US dollars as a bridge currency and reducing fees associated with processing payments. The ASEAN nations’ central banks have announced plans to implement a uniform structure for real-time bank transfers and central bank digital currencies, with the Monetary Authority of Singapore taking the lead.
What currency will replace the U.S. dollar?
One currency that has the potential to replace the US dollar is the Chinese yuan, as China has been trying to internationalise its use in recent years through initiatives like the Belt and Road Initiative. Another alternative is the digital currency proposed by the European Central Bank, which would allow the EU to take greater control of its monetary policy and reduce dependence on the US dollar.
The five major ASEAN economies and other countries’ shift towards diversified currencies is becoming a standard for countries with global influence and is part of an emerging multi-polar world. The move towards Dedollarization provides countries with a greater degree of economic autonomy and allows them to make decisions that best suit their own interests.
