There has been a recent accelerating trend towards "de-dollarization" in emerging markets. According to media reports, on April 1, the Indian Ministry of Foreign Affairs announced that India and Malaysia had agreed to settle trade in Indian rupees. Earlier, India and Russia were also pushing for a local currency settlement mechanism to move beyond the U.S. dollar. On March 29, Brazil announced that it had reached an agreement with China to no longer use the dollar as an intermediate currency, but to settle trade in local currencies. This signifies that, except for South Africa, all of the BRICS countries have substantially begun to use local currency settlement as an alternative to dollar settlement in trade. Earlier on January 18, South African Minister of International Relations and Cooperation Naledi Pandor publicly stated that the country was studying how the BRICS countries could help to establish a fairer currency trading system to challenge the dollar’s dominance. It is apparent that the "de-dollarization" of trade settlement promoted by the BRICS countries, which are the main force in emerging markets, has become a trend.
On March 28, the Meeting of ASEAN Finance Ministers and Central Bank Governors in Indonesia discussed reducing dependence on the U.S. dollar, euro, yen, and pound in financial transactions and shifting toward local currency settlement. ASEAN will further extend and expand the local currency trading (LCT) plan, which was previously attempted as a digital currency, to allow its member countries to use local currencies for trade. A day before, the Indonesian banking regulator stated that Indonesian banks are preparing to gradually phase out VISA and Mastercard and launch their own domestic payment system. Countries in the Middle East, such as Saudi Arabia and the United Arab Emirates, are also trying to diversify the settlement currency in the oil trade. These can all be seen as new trends in currency localization promoted by emerging markets over a period of time.
According to researchers at ANBOUND, the international monetary system is evolving from a singular currency system dominated by the U.S. dollar to a more geographically diversified and multi-currency system. While a singular currency is more favorable for foreign trade, changes in the geopolitical landscape and increased geopolitical risks have made the issues of efficiency and cost negligible. As a result, the drive for independent and diversified trade settlement systems in various countries is becoming more prominent.
On the U.S. side, some individuals have been reflecting on "de-dollarization". On March 30th, Elon Musk tweeted that, this is a “serious issue”, and that “US policy has been too heavy-handed, making countries want to ditch the dollar”. He further stated, “combined with excess government spending, which forces other countries to absorb a significant part of our inflation”. Jim O'Neill, formerly the Chief Economist at Goldman Sachs and the inventor of the term "BRICS”, has recently called for the BRICS group to expand its scale and challenge the dominance of the dollar, as he believes that the dominance of the dollar will destabilize the monetary policies of other countries.
Indeed, the drastic changes in U.S. monetary policy in recent years, spearheaded by the Federal Reserve, have been a significant factor in many countries diversifying away from the dollar. Following the financial crisis of 2008, the Fed embarked on a program of quantitative easing and caused the value of the currency earned from trade surpluses in many emerging countries to shrink. The COVID-19 pandemic-induced changes in Fed policy have only added to this instability, causing the dollar exchange rate to fluctuate widely and posing a major policy risk to trade and investment stability across many countries. The repercussions of this policy risk are far-reaching, not only causing market volatility in developed countries but also exerting a greater impact on emerging markets. While the U.S. economy is grappling with stagflation, characterized by high inflation and high-interest rates, emerging market countries are facing the dual pressures of inflation and high borrowing costs denominated in U.S. dollars. To mitigate the risks of dollar fluctuations, the global economy has increasingly turned to safe-haven assets like gold and digital assets. For BRICS countries, the first step towards reducing their reliance on the dollar involves bearing the costs of currency volatility. Meanwhile, the ongoing banking crisis in the U.S. has only compounded concerns over the value of U.S. assets and the dollar, creating opportunities for other countries to reduce their dependence on the currency.
The imposition of financial sanctions by Europe and the US after the Russia-Ukraine conflict is another crucial factor that has contributed to the global shift away from the dollar. These sanctions have not only frozen Russia's financial assets but have also caused many countries outside the conflict zone to realize the dangers of an international monetary system dominated by the U.S. The U.S.'s increasing reliance on sanctions as a tool to control the dollar settlement system has resulted in growing uncertainty in international trade. Consequently, many countries that are not closely linked to Europe and the U.S. have become reluctant to continue trading through the dollar. According to researchers at ANBOUND, these sanctions, while causing significant damage to Russia's economy and finance, will eventually impact the independence of the current dollar-dominated international financial, trade settlement, and clearing systems. In an increasingly politicized environment, the value-oriented international financial system will inevitably become more dependent on changes in geopolitical patterns. This trend is reflected in the various attempts at currency settlement, which are a signal that the currency system is accelerating its geopoliticalization. In the long run, the use of financial sanctions and other tools by the U.S. to exert its influence may ultimately erode the international status of the dollar as a dominant currency.
Despite countries' efforts to "de-dollarize", replacing the U.S. dollar with geo-currencies is a lengthy process. The construction and operation of a trade settlement system, along with key indicators such as exchange rates and prices, require further exploration by the market. Regional currencies, such as the renminbi, have less stability and market acceptance than the U.S. dollar, where trading costs and settlement risks are higher. Therefore, no geo-currency can challenge the U.S. dollar's position in the short term. The attempt of emerging market countries, mainly the BRICS, to establish an independent trading system, will pose a long-term threat to the dollar's status. This erosion may be gradual, but with many participants, it may snowball. As more countries reduce their dependence on the dollar, the U.S. economy will gradually weaken with the dollar's declining position.
Final analysis conclusion:
In recent times, there has been a growing trend among countries and regions like India, Brazil, and ASEAN to "de-dollarize". This trend is likely to become more pronounced as the problems with the U.S. dollar continue to mount. While it may not be possible to replace the dollar in the short term, the effect of countries reducing their reliance on it will become increasingly significant, eventually leading to a new global monetary geopolitical pattern.