DE DOLLARISATION : HOW FAR?

 For the last eighty years US Dollar has been at the commanding heights of the global economy as a powerful medium of exchange and store of value in the entire world which was universally accepted for transactions ranging from goods , services,capital flows and financial investment.On the contrary as  implied  the word Dedolarisation itself refers to the process of reducing reliance of US Dollar by countries as a medium of exchange, unit of account or as a reserve currency.Dedolariisattion make dollar less indespensible in international trade, stripping its use in trading of oil/ and other commodities and progressively substituting US  dollar with other currencies, gold  or alternate arrangements .In any case dependence on Dollars for the forex reserves, purchasing dollar denominated assets etc would be curtailed progressively.  It may be recalled here that historically the  US Dollar came into prominence through displacing  the  earlier dominant status of  colonial power Britain's Pound sterling as international reserve currency from 1920s.During the first world war US recieved significant share of wartime gold inflows.Subsequently US emerged as a stronger super power during the second world war.The international  monetary and financial conference held at Bretton Woods in July 1944 reached an agreement (Bretton Woods Agreement of 1944)As per the Agreement value of Gold was fixed at US $35 per one ounce.Over the time supply of gold became increasingly scarce to meet growing requirements for trade and investment. This paved the way for emergence of reserve currencies.Initially as mentioned earlier currencies of dominant imperialistic powers like British Sterling pound became popular.   Countries whose currencies was being held as reserve were committed to convert it into gold holdings. AS  long as the facility to convert British pound to gold continued the reserve status of pound sterling remained intact. But great depression of the 1930s, followed by the second world war largely shattered the British economy making it unable to follow rules of the gold standard, consequently stripping down the reserve currency status Of pound and US dollar came into prominence. 

Dollarisation which started since 1944  had been focusing on correcting  economic instability, high inflation and also the desire of people to protect and diversify their assets from risks of devaluation of their own currencies. The main advantage of dollarisation is the elimination of a sudden sharp devaluation of the country's exchange rate. Dollarised economies could enjoy a higher level of confidence among global investors, along with lower interest rate spread on their international borrowing, reduced fiscal costs and more investment and growth .To the question whether dollarisation is a better exchange rate regime particularly for developing countries the answer ultimately depends on each country's own unique characteristics. Not only that eventually USA found it very difficult to maintain the exchange rate fixed $ 35 per one ounce of gold within a band or range of 1% above or 1% below the par value.Due to spurt in demand for international liquidity and consequent demand for US dollar swelled.As the supply of dollars were inadequate in relation to liquidity requirements US printed more dollars to pay for its deficits with other countries.  Immediate cause for collapse of Bretton Wood system was the spread of rumour in March 1971 that the US would devalue the dollar and also there was a crisis of confidence in dollar and persistent problems of international liquidity .However the  Smithsonian Agreement of 18 December 1971 by 48 countries including US, Japan and number of European countries decided to abandon fixed exchange rate and agreed a new stable exchange rate with wider band.By 1985 US has permitted the dollar to float in relation to other currencies with occasional interventions when the dollar has reached extreme highs or lows (which is termed as managed floating exchange rate).

Despite minor setbacks US dollar continued to remain as a strong reserve currency in international trade and investment which the central banks keep as part of their foreign exchange reserves. Reserve currency refers to the currency held by the accounting country as foreign exchange reserves.Such currency is used for both international payments and reciepts and also served as a buffer to meet contingencies.Key Essential characteristics of a reserve curreny broadly are convertibility, usability and availability .The dollars role as the undisputed reserve currency of world facilitated the US to impose even unilateral sanctions against actions performed between other countries. As per IMF data US dollar accounted for 72.93% of the total reserves in 1965,which increased to nearly 85% both in 1970(84.85)and 1975(84.61).By 2002 dollar's share as reserve currency reduced to 66.5 with a  marginal reduction it reached 65.73in 2015.By 2022 US$ share dwindled to 58.3% followed by Euro 20.47,Japanese yen 5.59,Sterling pound 4.95,Chinese Remimnbi 2.69, Canadian dollar 2.38 and Australian dollar 1.96.Obviously the process of Dedolarisation is gathering momentum whereby countries resort to reduce their dependence on US dollar and trade and other transactions are done in their own currency or alternate resources including gold and other metals.Instead of stocking US dollar global central banks have been adding gold to their coffers since 1987 and in 2022 alone a whopping 1126 tonnes of gold was added.The dedolarisation move got a big push after the Russian Ukraine war when the dollar weapon was used against Russia byYu Western governments and $300 billion of Russian foreign currency reserves were frozen and Russian banks were expelled from the SWIFT international payment system (Society for Worldwide Interbank Financial Telecommunications) is a vast messaging network used by financial institutions to quickly, accurately and securely send and receive information about transactions. India has been allowing invoicing of exports and imports in Indian rupee instead of US Dollar or any other hard currency.In July 2022 RBI had set up rupee trade settlement mechanism to attract other countries in the context of sanctions imposed on Russia following Ukraine war.The mechanism required Indian traders to use special Vostro Accounts for settlement of rupee denominated trade invoices.Vostro account is essentially a rupee account held by a foreign bank with a bank in India as rupee transaction is credited to the Vostro account of partner country..Rupee payment mechanism has been gathering momentum at least among 18 countries with India .On the other hand US rivalry with China,fallout from Russia's war in Ukraine and wrangling over the US debt ceiling have weakened the dollar.The dollar share of central banks' foreign exchange reserves plummeted to a two decade low in the final quarter of 2022.

While India is purchasing Russian oil in UAE Dirhams and Russian rouble, China utilised its Yuan worth of $ 88 billion to purchase Russian oil, coal and metals.  In another dedolarisation move Chinese National Oil company CNOOC and French Total Energies completed first Yuan settled trade in March.In fact China made arrangements with 48 countries to use Chinese currency in all cross border transactions. Yuan's share in global transactions rose from zero 15 years ago to 7% now.Saudi Arabia and China discussed to settle Chinese oil sale with Yuan while both Brazil and China, Russia and China are doing substantial share of their trade in Yuan. Dedolarisation require  vast complex network of exporters, importers,currency traders, debt issuers and lenders. BRICS countries are planning to develop a common currency to compete with US dollar. Both Moscow and Beijing are aggressively leading the  change towards Dedolarisation. In short various dimensions of dedolarisation process indicated that there has been  limited progress in internationalisation of Chinese Yuan.Similarly attempt to evolve a BRICS common currency is yet to take shape.India has already established trade in domestic currency with eighteen countries. Many countries including Saudi Arabia,Iran, UAE and Russia opted for dedolarisation of all international transactions. According to Bank of International Settlement (BIS) data about 90% of global  foreign exchange transactions are still in US dollar. Similarly about half of offshore debts and half of all trade is invoiced in US dollar. US $ still remains key player in global economy and markets,  with 11.5% of world trade and 24% of global GDP. Increased transactions in  Euro,Yen,pound sterling and Yuan can make some breakthrough in dedolarisation process in a multipolar world. However the available evidence suggests that the importance of Green Back currency US dollar is bound to remain at least in the short period without much erosion,  despite the dedolarisation attempts,provided US restrain from increasing 'weaponisation 'of dollar.