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News > World

US Hegemony Backfires as Countries Opt for De-Dollarization

  • People walk past a foreign exchange office in Cairo, Egypt, March 21, 2022.

    People walk past a foreign exchange office in Cairo, Egypt, March 21, 2022. | Photo: Xinhua

Published 14 July 2022

The dollar's share of global reserves is expected to continue its trend of slipping as developing nations seek further diversification in the currency composition of their reserves.

India's central bank has recently unveiled an Indian rupee settlement system for international trade, a move which experts said will reduce the country's demand for U.S. dollars and alleviate depreciation pressure on rupee. Moreover, the new arrangement may facilitate trade with Russia and countries that are facing Western sanctions and help internationalize the currency in the long run. 


US Monetary Policies Could Bankrupt Developing Countries

As a matter of fact, with the U.S. dollar being increasingly weaponized by a self-serving Washington, countries have been seeking reliable alternatives to regain financial independence. India's introduction of rupee payment echoed that demand and could mark another step towards de-dollarization, observers said.


London-based economist Michael Roberts said that the dollar's decades-long dominance has placed America in a strong position to dictate the terms of trade and finance for the last 70 years, but its dominance has been waning gradually. Many central banks worldwide traditionally have U.S. dollars in their "rainy day funds" for continuous stability.

Still, data from the International Monetary Fund (IMF) indicates that reserves have been coming out of the dollar and trickling into other currencies. The share of U.S. dollar assets among the foreign exchange reserves of global central banks has dropped to a 25-year low, driven by exchange rate fluctuations and central bank actions.

"The IMF is correct in noting that over the past two decades, there has been a steady decline in the U.S. dollar's role as an international reserve currency," despite the dollar's long-established dominance, said Desmond Lachman, resident fellow at the American Enterprise Institute and a former IMF official.

"This steady decline has been largely a reflection of the relative decline of the U.S. economy in the world economy as the emerging market economies have increased their relative role," he added.

The dollar's share of global reserves is expected to continue its trend of slipping as emerging market and developing economy central banks seek further diversification in the currency composition of their reserves. The pace is likely to accelerate with Washington imposing financial sanctions on other countries from time to time and using the dollar dominance as a menacing tool for geopolitical coercion.

After Moscow launched the military operation in Ukraine, Washington has maneuvered a raft of sanctions against Moscow, removing Russian banks from the international financial messaging system SWIFT, freezing any Russian assets "touching the U.S. financial system," and threatening to "crush Russia's economy."

In response, Russia has developed its own financial transfer system -- the System for Transfer of Financial Messages (SPFS) -- as an alternative to SWIFT and required "unfriendly countries" to pay for gas supplies in rubles.

"Using financial sanctions can only encourage other countries to move away from the dollar and look to other currencies for credit and as a store of value. The dollar remains dominant but in relative decline," Roberts said.


For many economies, America's sizable economic toolkit remains a menace, which has forced them to toe the U.S. line or risk being cut off from the global financial market at Washington's whim.

Experts have warned the United States against using financial and other sanctions against countries that oppose its policies. "The United States could grab anybody's gold who did not follow American policy," stealing their foreign exchange and savings, said Michael Hudson, professor of economics at the University of Missouri-Kansas City.

The Wall Street Journal argued in March that developing countries have turned to accumulate more funds to shield their currencies from crashes after the 1997 Asian Financial Crisis. "Sanctions have shown that currency reserves accumulated by central banks can be taken away," it said.

At the same time, the world is feeling the bite of sweeping Western sanctions against Russia and the U.S. Federal Reserve's hawkish move to raise its benchmark interest rate. The U.S. inflation data, a fresh four-decade high, fueled investors' speculation of further aggressive interest rate hikes by the U.S. Federal Reserve, which led the U.S. currency to strengthen, according to Der Spiegel, a German weekly news magazine.

The ongoing monetary tightening by the Fed, as well as increasing oil and food prices, could plunge third-world countries into bankruptcy and push them to sell public assets to American investors, said Hudson.

The balance of payments with African and Latin American countries is going to run into deficit due to an outflow of investment money, as well as higher prices of oil, food and foreign debt, he said, adding that essentially the United States is using a monetary policy with or through the Fed to bankrupt third world countries.

Multiple cases of economic and financial instability amid the dollar's ascent can "merge into a bigger, more dangerous combination of damaged global growth, debt defaults, and social, political and geopolitical instability," Mohamed A. El-Erian, president of Queens' College, Cambridge University, said in an opinion piece published in May by the Financial Times.


As the United States presses on with its financial hegemony, countries, especially those in the Global South, are sobering up to Washington's egoism and exploring paths to break away from the dollar and fend for themselves.

They are increasingly aware that Washington's attempts to deliberately create economic decoupling, technological blockades and industrial chain disruptions will aggravate the supply chain crisis and strain the global recovery.

Andrei Kostin, president and chairman of the Management Board of VTB, one of Russia's systemically important banks, said that Washington's "weaponization" of financial instruments has inevitably undermined trust in the U.S. dollar as the main reserve currency and means of payment, prompting a weighty argument in favor of a wider use of other currencies.

Jeffrey Sachs, professor and director of the Center for Sustainable Development at Columbia University and senior United Nations advisor, said the role of the dollar is shrinking as the share of the U.S. economy in the world economy declines.

The process has been accelerated, he said, as the U.S. repeatedly resorts to sanctions and with the rise of digital settlements, "because U.S. financial power depends heavily on the control of the SWIFT settlements system, which will also diminish in importance."

"The U.S. has gotten into a bad habit of confiscating the central bank reserves and private assets of other countries," Sachs said.

"We should keep one thing in mind. Why should our companies continue to toe the Western countries' line or dictates in choosing, or not choosing, a particular currency for making payments," an official at India's Ministry of Commerce and Industry said on the condition of anonymity.

"Every private company works for earning profits, and decisions like choosing a currency for making payments should be left to those companies alone," said the official.

Mohammed Saqib, secretary-general of the India China Economic and Cultural Council, believes that a problem with the current international financial system is a dominant dollar that "doesn't support any other currency to come up, even Euro or Yen."

"But now new trends are setting, and countries are willing to take chances in trading outside the dollar," he added.

Gita Gopinath, the IMF's first deputy managing director, said in an interview with the Financial Times earlier in March that the unprecedented financial sanctions imposed on Russia, including restrictions on its central bank, threaten to gradually dilute the dominance of the U.S. dollar and result in a more fragmented international monetary system.

"The dollar would remain the major global currency even in that landscape, but fragmentation at a smaller level is certainly quite possible," Gopinath said, noting that the sweeping measures imposed by Western countries could encourage the emergence of small currency blocs based on trade between separate groups of countries.


Gita Gopinath
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