Firstpost:
The US dollar has been the official currency for international trade for
years now. However, in recent times there has been talk of creating a
new currency in an attempt to dump the dollar and push back against
American hegemony.
This de-dollarisation has received a boost in recent times, especially
after the Russia-Ukraine war began last February. And last week, this
movement received further impetus when Alexander Babakov, the deputy
chairman of the State Duma, was quoted as saying that the BRICS nations
are in the process of creating a new medium for payments — established
on a strategy that “does not defend the dollar or euro”.
Is the BRICS nations actually creating a new currency for trade? Who’s
at the forefront of this movement? Will it benefit India? Will the plan
actually fructify? There are several questions to this issue and we try
to answer them all.
Dethroning the king of currency
The US dollar has been called the king of currency. It became the
official reserve currency of the world in 1944. The decision was made by
a delegation from 44 Allied countries called the Bretton Woods
Agreement.
Since then, the dollar has enjoyed a powerful status in the world. It
has given the US a disproportionate amount of influence over other
economies. In fact, the US has for long used imposition of sanctions as a
tool to achieve foreign policy goals.
However, not everybody likes playing by US rules and countries like
Russia and China would like to call a halt to dollar hegemony. This
process is called de-dollarisation — and it refers to reducing the
dollar’s dominance in global markets. It is a process of substituting
the US dollar as the currency used for trading oil and/or other
commodities.
The proponents of de-dollarisation say that this process would reduce
other countries’ dependence on the US dollar and the US economy, which
could help mitigate the impact of economic and political changes in the
US on their own economies. Moreover, countries can reduce their exposure
to currency fluctuations and interest rate changes, which can help to
improve economic stability and reduce the risk of financial crises.
This move has been gaining speed in the last few years, especially in
the previous year. In 2022, the International Monetary Fund noted that
central banks today are not holding the greenback as reserves in the
same quantities as yesteryear.
“The dollar’s share of global foreign-exchange reserves fell below 59
per cent in the final quarter of last year, extending a two-decade
decline, according to the IMF’s Currency Composition of Official Foreign
Exchange Reserves data,” the paper stated. “Strikingly, the decline in
the dollar’s share has not been accompanied by an increase in the shares
of the pound sterling, yen and euro, other long-standing reserve
currencies… Rather, the shift out of dollars has been in two directions:
a quarter into the Chinese renminbi, and three quarters into the
currencies of smaller countries that have played a more limited role as
reserve currencies.”
To punish Russia for its invasion of Ukraine, western governments froze
$300 billion of Russia’s foreign currency reserves last year, roughly
half the total, and expelled Russian banks from the Swift international
payments system.
