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Talks about de-dollarisation took center stage this week as the BRICS summit took place in South Africa. Most speakers, including Russia’s Vladimir Putin and China’s Xi Jinping, continued to express their concerns about the dollar hegemony.
These concerns are valid since the US has used the US dollar as a weapon in the past few years. And the strength of the greenback is hurting most countries, including Russia, China, and South Africa.
Most countries with dollar-denominated debt are struggling because of its strength. And there is a likelihood that many of them will need a rescue package from the IMF in the coming years.
US dollar index chart
However, as I wrote here, replacing the dollar as the reserve currency of the world is not easy. Recent statistics show that the USD is used in more than 70% of all transactions in the world today. In my recent article, I argued that the Swiss franc as a viable alternative to the USD.
At the same time, most countries still hold billions of dollars in foreign reserves. China’s foreign reserves stands at over $3 trillion while Saudi Arabia has almost $500 billion. India’s reserves are over $600 billion.
I believe that using local currencies for trade has challenges. For example, recently, Russia found itself with billions of Indian rupees that it could not use. This happened as Russia accepted rupees for its oil shipments.
In a statement on Friday, India’s oil and gas minister said that de-dollarization has a long way to go. He said:
I wish the Indian rupee should be the lead currency in the world. But I’m also a realist. We heard about decoupling. But these international arrangements, trading arrangements, payment arrangements, these have been in place for a long time.”
Analysts at ING are also a bit skeptical about the de-dollarization trend. For one, they argued that oil and gas trade accounts for just 15% of the world trade. They also noted that:
“Until international issuers and investors are happy to issue and hold international debt in non-dollar currencies we suspect this will be a decade-long progression to a multi-polar world.”
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