The global financial system is shifting away from dollars, and this will impact everyone on the planet.
Since the Bretton Woods agreement in 1944, the US Dollar has been the center of the global financial system.
As the world’s primary reserve currency, goods are traded globally using the US dollar for payment.
It’s easier for different nations to buy and sell using a single currency, and the Dollar was selected for this role after World War II.
However, as outlined in the Triffin Dilemma, this role has pros and cons for the nation that issues the reserve currency.
It helps the currency have a high value, as demand for Dollars is constant. This means it’s inexpensive to buy products made in other countries using dollars.
A strong Dollar goes a long way in the global marketplace.
The downside is that US manufactured products are expensive for people in other countries.
This harsh reality damaged US industries over the past few decades, and is why most goods Americans buy are produced elsewhere.
In the mid-1970s, the US government made an agreement with the middle eastern OPEC nations to only sell oil using US Dollars. This is called the Petrodollar agreement.
The Petrodollar agreement keeps the value of the dollar high, and in return, the US military agreed to protect the global shipping routes.
This led the US to take on the role as global cop of the playground, and at times, that privilege has been abused.
If a nation does not align with US political or financial interests, sanctions are imposed. This means the US has considerable power over every other country, and not every nation benefits from that arrangement.
Over the past decade, a new alliance has formed between the BRICS nations (Brazil, Russia, India, China and South Africa).
Earlier this year, the BRICS nations announced plans to issue a new currency for trade, outside of the US Dollar.
This would free those nations from being accountable to US political interests, and make purchasing products more affordable to nations with weaker currencies.
US manufacturing could also be more competitive if the value of the dollar were weaker.
This shift away from centering around dollars is referred to as De-dollarization.
The US financial system benefits from a strong dollar, and won’t support the US losing the status of issuing the ONLY global reserve currency.
One response to “What is De-Dollarization?”
Thank you for the article. I appreciate that you defined BRICS. I never knew what that was but you took the time to define it for people not in the know! As a European now, who lived in the US most of my life, I am now seeing the other side of the coin. The Euro is weaker that the dollar and the fuel costs are hurting the EU countries. Combined by the high inflation and the US now increasing their interest rates – it seems like the US will have to contend with less influence long-term.