The Rise of De-Dollarisation: What You Need to Know

The Spotlight

10 minutes read

Jun 22, 2023

Banknotes of the US dollar are gradually transforming into grains of sand within the confines of an hourglass.

Discover how the world's shift away from the dollar could reshape economies, challenge financial stability, and impact the price of gold.

Have you ever wondered what “de-dollarization” means and how it could potentially affect the global economy and the price of gold?🪙

Well, you're in the right place! This blog post will dive deep into the world of de-dollarization, exploring its meaning, impact on the world economy, and implications for the shining metal we all love — gold.✨

So, let's dive right in and explore what de-dollarisation means. 👀

What Does De-Dollarisation Mean?

The dollar has been the standard currency around the globe for many years. For example, oil, gold, and most commodities are quoted in dollars. Many countries keep a large portion of their savings in U.S. dollars, usually by investing in U.S. Treasury Securities.

So, de-dollarisation refers to when countries sell their U.S. Treasuries to hold reserves in other currencies or gold.

💡What is a reserve currency?

You see, a reserve currency is a currency that's widely accepted and used around the world. So when countries start using other currencies instead of the dollar, that's what we call de-dollarization.💸

The U.S. dollar has been the world's primary reserve currency since the end of World War II. This is because of several factors, including:

● The size of the U.S. economy

● The strength and stability of the U.S. financial system

● The political and military power of the U.S.

Despite a decrease in the U.S. dollar's share in central banks' foreign exchange reserves, it still maintains its position as the primary global reserve currency. In fact, as of 2021, the dollar accounts for over 60% of global forex reserves. To put it into perspective, the euro and the yen come in second and third place, respectively, following the U.S. dollar.

According to data from the International Monetary Fund (IMF), the dollar's share in central banks' foreign exchange reserves has declined from over 70% in 1999 to around 59% in 2021.

Essentially, this means the dollar's dominant position in international trade and finance is challenged.

You might wonder, "Why would nations step away from the U.S. dollar?"

Well, there are a bunch of reasons for that!

Let's break it down:

  1. Concerns over excessive U.S. influence 😬
  2. Geopolitical shifts 🌍
  3. Economic diversification strategies 💼
Banknotes of the Swiss Franc, Euro, Chinese Yuan, and Russian Ruble.

For instance, the U.S. has placed strict financial and economic sanctions on countries like Iran and Russia. In short, both countries have restrictions on using the U.S. dollar.

This means Iran and Russia have started the de-dollarisation process.🚀

A graph showing US dollar losing its position as the most traded currency in Russia between March 2022 and March 2023

Other countries like China and Brazil are also moving in that direction. They've made a deal to trade in their local currencies instead of using the U.S. dollar. For example, China's holdings of U.S. Treasury Securities have reached their lowest level since May 2009 amid mounting threats of financial sanctions from Washington:

A graph showing how China’s holdings of U.S. Treasury Securities have dropped between 2009 and 2023

On the flip side, countries in the Eurozone want to promote their own currency, the euro, and make it favourable internationally. They reckon it'll make their economies stronger and give them more control over their finances.💪

But here's the thing, financial sanctions may not be the main reason why central banks are diversifying away from the U.S. dollar.

It turns out other major currencies like the euro, British pound, and Japanese yen are also part of the equation. These countries team up with the U.S. when placing sanctions, which means those currencies don't become the preferred alternatives for governments and central banks looking to reduce the dominance of the U.S. dollar.

But, new agreements are cropping up where countries settle transactions using currencies other than the U.S. dollar. These agreements aim to give more choices and lessen reliance on the U.S. dollar for global financial transactions.🤝

So, while financial sanctions might not be the main driving force behind central banks' diversification, there are other factors at play, and alternative currency settlement agreements are being actively explored.

Effects Of De-Dollarisation On The World Economy

Interconnected world

As the world economy deals with de-dollarization, we might need to tackle some important challenges to make this shift smooth and stable.

One key thing to consider is how it affects global financial stability. When countries start relying less on the U.S. dollar, it can shake up the composition of global reserve assets.

And you know what that means?

It can change the way money circulates and even mess with asset prices. Without proper coordination and risk management, these changes might create financial instability.

It's especially important to watch out for:

● Emerging markets 📈

● Countries with heavy debt in U.S. dollars 💰

But, finding a replacement for the U.S. dollar isn't straightforward either. The chosen currency must meet a bunch of criteria:

● Stable

● User-friendly

● Widely trusted

● Backed by a strong economy

● A big and active market

● Good money and financial rules

Right now, though, no single currency fits the bill perfectly.

However, the euro and the Chinese yuan are making some progress. Having multiple currencies in the reserves could help spread the risk and avoid relying too much on just one currency.

Also, when countries reduce their use of the U.S. dollar, it can make exchange rates between different currencies more unstable, especially at the beginning.

As people in the market adjust and decide which currencies they prefer, you might see fluctuating exchange rates. This can have a real impact on how countries trade with each other, invest in each other, and move money around.💸

So, going through these factors, you can probably sense how challenging it is to solve such an issue. It's especially true for countries with less developed financial systems or limited control over exchange rates.

That's why policymakers and people in the market need to keep a close eye on these changes and have the right policies to manage any issues. 👀

Effects Of De-Dollarisation On Gold

The US dollar symbol with a 1 kilo PAMP Suisse fine gold bar, 50 g gold bar, and a Canadian Maple Leaf gold coin

Things can get pretty interesting when it comes to de-dollarisation and its impact on gold! During times of currency instability, gold has historically been seen as a reliable store of value.

So, as de-dollarisation gains more traction, some investors might start looking at gold as an alternative to the U.S. dollar.

And guess what?

This increased interest could lead to a surge in demand for gold and, as a result, put some upward pressure on its price! 📈

To make it even more interesting, central banks have also got their eyes on protecting their money from sanctions. They have two options to consider:

● Gold

● Other nontraditional currencies

And some emerging market central banks have actually been increasing their gold reserves. In fact, this trend became even stronger in 2022, with central banks buying more gold than in any other year of this century.

According to a World Gold Council (WGC) survey, 63% of banks expect gold to play a bigger role in their total reserves over the next five years. That's quite a jump from last year's figure of 46%!

According to Nicky Shiels, Head of Metals Strategy at MKS PAMP GROUP, “in the longer-term, the U.S. has not solved their debt problem and levels are skyrocketing, creating an underlying structural tailwind for Gold buying (especially via Central Bank gold purchases as they ramp up dedollarization policies).”

Practical Considerations and Future Outlook

Now that we've covered the basics of de-dollarisation and its impact on the world economy and gold, let's delve into some practical considerations and look into the future.

So, what can individuals, businesses, and governments do to navigate this changing landscape? 🤔

For a starter, we've seen central banks expecting gold to grow as a reserve asset. And so, if you're looking for ways to diversify your assets and tap into the golden potential, it might be worth following in the footsteps of the central banks. 😉

After all, wise people tend to draw inspiration from the experts.

Keep your eyes peeled on global economic developments, currency trends, and policy shifts.

Educate yourself about possible investment opportunities and risks linked to de-dollarization. Remember, each country's situation is unique, and what works for one may not work for another.

Here's the deal: de-dollarisation is a complex and evolving process. It's impossible to predict its full impact with certainty. But one thing is certain—change brings opportunities. As new currencies gain prominence, investment prospects and avenues for economic growth will exist.

Key Takeaways

● De-dollarisation challenges the dominance of the U.S. dollar, bringing both pros and cons to the table for countries.

● It can also influence the demand and price of gold as investors look for alternative safe-haven assets.

● Remember, the world of de-dollarisation is vast and ever-evolving. You should continue exploring this topic, keep researching, and stay informed.

● As you embark on your financial journey, approach it with an open mind, adaptability, and a positive outlook. Change brings opportunities, and by staying informed and flexible, you'll be well-equipped to navigate the world of de-dollarisation and its impact on our interconnected world.


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