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The global financial system is undergoing a profound transformation as the dominance of the US dollar is increasingly challenged by a multi-currency system. This shift, driven by geopolitical tensions and strategic economic policies, signals a significant move towards de-dollarisation.
Recent Developments in De-Dollarisation
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EU’s Controversial Decision: The European Union recently announced plans to use interest earned on frozen Russian assets to fund Ukraine’s military needs. EU’s top diplomat, Josep Borrell, revealed that the first tranche of interest from €300 billion in frozen assets, amounting to €1.4 billion, will be transferred to Ukraine in early August. This decision has been met with strong objections from Russia, with Kremlin spokesman Dmitry Peskov labeling it as “thievery” and a violation of international law.
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Saudi Arabia’s Strategic Shift: On June 9, 2024, Saudi Arabia decided not to renew its petrodollar agreement with the US, which had mandated oil sales in US dollars since 1974. This move allows Saudi Arabia to sell oil in various currencies, reflecting a broader trend towards de-dollarisation. The G7’s initial plan to allocate frozen Russian assets directly to Ukraine was altered due to Saudi Arabia’s threats to withdraw significant assets from Europe and the US. Instead, only the interest will be sent to Ukraine, highlighting concerns over the reliability of Western financial institutions.
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China’s Diversification: China has significantly reduced its holdings in US Treasury bills from $1.3 trillion to less than $780 billion, shifting investments towards gold. Similarly, Japan and Saudi Arabia are gradually divesting from dollar-denominated assets. A large-scale withdrawal by these nations could destabilize the global financial system, depreciate the US dollar, and impact dollar-denominated assets.
The Risks and Reactions
The West’s actions, including the controversial use of Russian assets and the shift away from the petrodollar system, may accelerate de-dollarisation but also pose significant risks. These actions could lead to a loss of confidence in Western financial institutions, prompting massive withdrawals of funds and potential economic downturns.
The Emergence of a Multi-Currency System
The Global South, led by China, is advancing towards de-dollarisation at a controlled pace. Dr. Asfaque Hasan Khan predicts that while a new BRICS currency may not emerge in the next five years, the use of local currencies in trade will gain momentum. Currently, 53% of Chinese trade is conducted in currencies other than the US dollar. As China anticipates potential conflicts with the US, it is reducing its dollar-denominated assets to mitigate risks.
China’s strategy is part of a broader effort to challenge the US dollar’s dominance. By 2030, China is expected to become the world’s largest economy, a status the West aims to delay. The use of frozen assets or their interest to fund Ukraine’s military undermines trust in the global financial system and violates international norms.
Concerns and Future Prospects
Middle Eastern countries, particularly Saudi Arabia, Dubai, and Qatar, are concerned about similar actions against their assets. The dominance of the US dollar is being increasingly challenged by the use of local currencies in international trade. Countries like India and Turkey are already trading with Russia using local currencies, and Pakistan is turning to barter trade and currency swaps to manage dollar-denominated debts.
Challenges Ahead
Despite these efforts, significant challenges remain in reducing dollar hegemony. Emerging markets often lack the institutional quality and capital market depth required to fully replace the dollar’s role. However, the gradual shift towards a diverse set of local currencies is undeniable and will continue to shape the future of global finance.
As the global financial landscape evolves, the transition from a dollar-dominated system to a multi-currency framework will be pivotal in redefining economic power and stability. The coming years will be crucial in determining the extent of this transformation and its impact on the international financial system.
