In August India made its first international payment in Indian Rupees to Abu Dhabi.

The news ignites the recently talked about topic of de-dollarization and whether more countries will join the call to abandon the US Dollar.

The hype around the movement aside, the US dollar remains the world’s strongest currency and the leading tool for international payments around the globe.

What is De-Dollarization?

The term de-dollarization refers to shifting away from the US Dollar as the world’s leading reserve currency.

The Dollar has been the world’s leading currency reserve and the tool to conduct international trade and settle payments between nations.

Despite a strong history for the last several decades, the global share as the leading foreign reserve for the US dollar has dipped slightly.

Since China has been the most vocal for de-dollarization, the Chinese Yuan Renminbi is thought to be the leading alternative currency when it happens, but it still remains a far cry.

Why More Countries Are Abandoning the US Dollar?

Political and economic factors combined have fueled the calls to shift away from the US Dollar, but the absence of a viable alternative currency remains a big challenge.

Political Tensions

America’s political tensions with China, Russia, and Brazil have played a key role in pushing the call for an alternative global currency other than the US Dollar.

The political bloc BRICS comprising Brazil, Russia, India, China, and South Africa has made practical efforts to introduce a new joint currency for payments between the members.

Shifting Economic Dynamics

The emerging economic dynamics like an increased trade volume between specific regions or countries are another key reason for the consideration of de-dollarization.

For instance, the trade volume between China and Brazil reached $157.7 billion in 2022 with a total increase of 11% from the previous year.

In response to these shifting economic dynamics, forex markets have been closely monitoring the trade patterns and currency reserves. The emphasis on de-dollarization has brought about a renewed interest in forex trading, especially focusing on emerging market currencies.

Similarly, other leading economies like India are considering payments in their local currencies with their trade partners like the UAE, KSA, Russia, and China.

Calls to Decrease Dependency on the US Dollar

Political and economic factors combined; many countries want to end reliance on a currency over which they have little to no control.

The most vocal voices for this call have come from the traditional US challengers Russia and China. Others like South Africa, UAE, India, and Brazil have followed suit.

Is Dollar Dominance Over?

So, the real question is Dollar dominance over?

Realistically, it is an uphill task to move the greenback from the top slot of the leading foreign currency reserves.

Let’s analyze some key factors to answer the burning question.

The Dollar is Involved in 90% of Trades

According to a Bank of International Settlements report, out of the daily 7.5 million international transactions, 6.6 million involved the US Dollar.

It means almost 90% of international trade transactions involve US Dollar at least from one side.

It debunks the myth that central banks around the world have reduced the usage of the dollar as their primary source of payments.

The Dollar Holds a 59% Foreign Reserve Share

The Dollar’s incumbency as the leading foreign reserve is in no danger either.

An IMF report suggests it holds a whopping 59% of the world’s total foreign reserves as of Q1 2023.

The same report also suggests that the Chines Yuan Renminbi accounts for only 2.9% of the total foreign reserves, unlike the common notion.

The Dollar is the Safe Haven

For the factors listed above, the US Dollar is considered a safe haven by central banks, governments, monetary funds, and investors around the world.

It means the demand for the US Dollar isn’t fading any time sooner.

Absence of a Viable Currency 

As the IMF report shows, there is no viable currency that can challenge the dollar as the leading foreign currency reserve.

Even if a regional bloc like the BRICS introduces a new currency, it will take decades to dethrone the dollar.

Will the De-Dollarization Impact the US Economy?

Despite the hype around the so-called movement of de-dollarization, it remains an uphill task to challenge the king.

If it happens then the impact on the US economy will be dramatic, at least for the short term.

The US will need to find alternative sources of external funding and the costs of borrowing will rise.

It means the US stock markets will shake up too. The domestic costs of doing business will also increase.

Overall, it will take drastic efforts to inhale the impact of de-dollarization for the US. However, in the long term, the total impact will negate as the US economy will eventually settle into the new norm.