Not as $trong, but $till $ignificant

Recent reports suggest that Saudi Arabia has purportedly shifted away from the US dollar in its oil trade agreements, or the petrodollar system. While these reports lack evidence, the developments fuel speculation in the global financial system.

BRICS nations have signalled intentions to reduce their dependence on the dollar, advocating using local currencies in cross-border transactions among member states.

Several central banks are also exploring blockchain-based digital currencies, challenging reliance on the dollar.

Recent geopolitical tensions, escalating economic sanctions and growing policy uncertainties have further catalysed a shift towards alternative assets like gold, which are resistant to currency freezes and geopolitical risks. Notably, RBI recently relocated 100 tonnes of gold from Britain to India to mitigate potential counterparty risks.

So, has the greenback's global grip started to wane? According to a June 2024 IMF study 'Dollar Dominance in the International Reserve System: An Update', the US dollar's share of global forex reserves has declined to above 55%, down from 70% at the turn of the century. However, other major currencies - euro, yen, Swiss franc and British pound - have not significantly increased their share. Instead, the reduction in dollar reserves has accompanied a rise in non-traditional reserve currencies, including the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singapore dollar and Nordic currencies. Clearly, despite the decline, the dollar maintains a significant presence.

Conversation around de-dollarisation has roots dating back to the dissolution of the Bretton Woods System in the early 1970s. Yet, the greenback continued to dominate, thanks to the robustness of the US economy and its deep financial markets. However, the rapid globalisation and economic expansion in emerging economies, spearheaded by China since the mid-1980s, increased demand for reserve currencies beyond what the US could supply in dollar reserves.

Also, introduction of the euro in the late 1990s, growing adoption of the Chinese renminbi in trade transactions and the rise of BRICS collectively moderated the dollar's position, albeit only to some extent.

As the world's largest economy, the US remains a global trade and investment hub. Despite challenges, including those posed by the pandemic, the US economy has exhibited resilience compared to other major economies.

Conversely, China, the second-largest economy, has faced regulatory crackdowns and structural imbalances in its export-oriented model, limiting the renminbi's internationalisation. Further, cryptocurrencies have not yet achieved mainstream adoption.

Should de-dollarisation trends intensify, implications for the US could include higher borrowing costs. As of January 2024, foreign holdings of US treasury securities amount to about $8 tn, critical for funding the US debt exceeding 120% of GDP. A shift away from the dollar could potentially weaken its demand and lower its value, which might enhance US competitiveness by improving the trade balance, but also exacerbate inflationary pressures.

A slowdown in economic activity driven by higher borrowing costs in the US does not augur well for other countries, especially in the short term.

A declining dollar dominance also has significant implications for the oil market. Traditionally, oil prices have been inversely linked to the dollar. A stronger dollar raises imported oil costs and dampens demand, especially in emerging markets. However, according to a JPMorgan study, this correlation has weakened in recent years.

For emerging economies like India, where a substantial portion of trade and investments are dollar-denominated, de-dollarisation efforts offer opportunities to reduce vulnerability to exchange-rate fluctuations and enhance monetary policy autonomy. India has taken steps to promote the use of the rupee in international trade, including encouraging oil exporters and refineries to settle transactions in rupees and allowing foreign banks to open Special Vostro Rupee Accounts (SVRAs).

However, India's efforts in rupee trade have yet to yield the desired results. Further liberalisation of India's capital account is needed to achieve this objective.

Mukherjee is professor of economics, Shiv Nadar University, Chennai, and Arora is assistant professor of economics, Delhi Technological University