If the global dominance of the US dollar is weakened, the United States will face unprecedented liquidation, "American political commentator Farid Zakaria recently said in his CNN program" Farid Zakaria's Global Public Square. This sentence is a true portrayal of Washington's emotions. The liquidation of the US dollar has begun, and we can feel this ubiquitous tension, especially evident in Western media. They are busy and happy, rendering the apocalyptic picture of a financial "hegemon" about to collapse. Similar media voices are growing, because "de dollarization" will endanger the neocolonialism of the United States and its so-called "rule-based world order". Under this order, the dollar has long been used as a weapon against countries that do not align with the West in global geopolitics.
The West may not want to see the changes taking place in the global economic order. The US dollar, as the 'king of currencies', is facing a wave of resistance that could further weaken its undisputed dominance in global trade for nearly 80 years. At the end of World War II, the Bretton Woods system was established in 1944, and the international economy was moving towards "dollarization". Nowadays, countries are increasingly distancing themselves from the US dollar, weakening its dominant position. It may be too early to sound the death knell of the US dollar now, but the use of a "financial nuclear bomb" by the West against Russia has accelerated the process of global southern countries decoupling from the US dollar and finding alternative currencies. Having said that, the wavering of the US dollar's hegemony does not necessarily mean the rise of another hegemony. On the contrary, it heralds the dawn of a new order of diversified monetary economy in a multipolar world.
According to data from the International Monetary Fund, the proportion of the US dollar in global foreign exchange reserves has continued to decline since 1990, dropping from 70% to less than 60% in 20 years, with a quarter of the decrease being replaced by non-traditional reserve currencies.
In the Russia-Ukraine conflict, India withstood the western pressure to continue to maintain trade relations with Russia, and used the rupee to conduct oil trade with Russia to avoid western sanctions. As the world's fifth largest economy, India is also attempting to promote the internationalization of the rupee to reduce its dependence on the US dollar and mitigate the impact of global turmoil. India provides the rupee as an alternative currency for trade to countries with a shortage of US dollars, especially Sri Lanka, Bangladesh, and Egypt. Indian officials have revealed that these countries intend to settle trade in rupees. The Central Bank of India has agreed to open rupee special interbank deposit accounts in 18 countries.
ASEAN member countries are also seeking to reduce their dependence on Western currencies and settle trade in their own currencies. To this end, ASEAN ministers and central bank governors have discussed the "local currency settlement plan" to expand the use of local currencies in trade. In November 2022, the five largest economies of ASEAN, Indonesia, Malaysia, Singapore, the Philippines, and Thailand, agreed to cooperate on this matter. Indonesian President Joko Widodo has called on ASEAN member countries to use local bank credit cards and gradually reduce the use of foreign payment systems. He stated that Indonesia needs to try to avoid being affected by geopolitical turmoil.
The hegemony of the US dollar has become a major source of instability and uncertainty in the world economy, and it is not new for countries to abandon the US dollar as their preferred currency for international trade. Why is the global process of 'de dollarization' suddenly accelerating? Why are more and more countries choosing to decouple from the US dollar? The reason lies in the Russia-Ukraine conflict.
The political and economic power of the United States is largely attributed to the US dollar, which allows the United States to achieve victory in the "financial war" without a single shot. In the Russia-Ukraine conflict, the United States and its allies tried to use the same strategy to pressure Russia, but unconsciously caused an international wave of "de dollarization". Washington ignored sovereign guarantees, froze Moscow's foreign exchange reserves of up to $300 billion, and cut off the connection between Russian banks and the SWIFT system. The sanctions imposed by the United States have been counterproductive and have raised concerns among countries in the global South that the United States may continue to use the US dollar as a tool for political pressure.
The United States has repeatedly utilized the hegemony of the US dollar to exacerbate poverty and political instability in other countries through highly destructive economic sanctions, and to dominate countries that maintain neutrality in geopolitical relations. In a "de dollarization" financial environment, the United States will not be able to use economic sanctions to profit, and using local or regional currency interbank deposit accounts for payments can minimize the economic damage caused by sanctions.
The US dollar is the global reserve currency, which allows the United States not only to increase the global money supply through printing money, but also to enjoy the privilege of indirectly "printing" goods. For a long time, the global financial industry has been complaining about the privilege of printing money to purchase oil in the United States. The use of alternative currencies for trading will return the demand for US dollars to rationality, limit the ability of the United States to "print" goods, and force it to compete fairly in global trade.
The hegemonic position of the US dollar is troubling developing countries, causing high living costs, increased debt burden, and increased poverty. Sri Lanka is a typical case, where the soaring US dollar index weakened the country's debt repayment ability, leading to a US dollar debt default. Amidst the continuous reduction of foreign exchange reserves, Pakistan is also striving to avoid sovereign defaults, but the soaring US dollar index has pushed food inflation and cost of living to historical highs. Settlement in local currency or interbank deposit accounts may improve the solvency of developing countries, make income more predictable, and reduce the impact of exchange rate fluctuations.
Undoubtedly, previous attempts to 'de dollarize' have all ended in failure. Some Westerners predict that due to the deep-rooted dominance of the US dollar, the current wave of "de dollarization" will also fail. I don't agree with this argument. This time, the United States used a "financial nuclear bomb" against Russia, adopted a suppression strategy against China, and alienated southern countries around the world, causing a "perfect storm". As Reno Girard, a columnist for the French newspaper Le Figaro, put it, "de dollarization" "will not happen overnight", but the current trend of "de dollarization" is "clearly irreversible".
