De-dollarisation

What is meant by De-dollarisation?

• De­dollarisation refers to the replacement of the U.S. dollar by other currencies as the global reserve currency.
• A reserve currency refers to any currency that is widely used in cross­border transactions and is commonly held as reserves by central banks.
• Countries have tried to dethrone the dollar as the global reserve currency for many decades now for various reasons.
• But of late, attempts to de­dollarise have picked up pace in the aftermath of Russia’s invasion of Ukraine last year.
• The U.S. imposed several sanctions that restricted the use of the U.S. dollar to purchase oil and other goods from Russia, and this has been seen by many countries as an attempt to weaponise the dollar.
• Since international transactions carried out in the U.S. dollar are cleared by American banks, this gives the U.S. government significant power to oversee and control these transactions.
• Currently, the Chinese yuan is seen as the primary alternative to the U.S. dollar owing to China’s rising economic power.

The advantages of being the reserved currency:

• It should be noted that when a country’s fiat currency enjoys reserve currency status, it gives the country the power to purchase goods and other assets from the rest of the world by simply creating fresh currency out of thin air.
• The U.S. central bank usually increases the supply of dollars through various means to tackle economic downturns and also to fund the U.S. government’s expenditures.