EDITORIAL: It is interesting, and indeed very instructive, that 2024 ended with fresh debate about the de-dollarisation phenomenon even though the dollar index (DXY), which measures the greenback’s performance against six most traded currencies, finished the year a good 5.7 percent higher.
Talk of diversifying international trade away from the traditional reserve currency is not new as many countries, especially America’s political rivals, have been thinking and working on these lines since before the turn of the century.
Given this trajectory, it’s no surprise that even as King Dollar, as it is referred to in financial markets, stamped its authority once again in the previous year in terms of sheer exchange value, its share in global foreign exchange reserves slid to the lowest level in almost 30 years, according to IMF (International Monetary Fund) data.
The crux of the argument over the last couple of years, especially since the onset of the Russia-Ukraine war, has been how Washington has begun to militarise the greenback against countries that refuse to toe its line politically – even in matters far removed from the world of finance, trade and exchange rates.
As part of the sanctions slapped on Russia, the US cut off the country’s central bank from dollar transactions. It also banned the export of dollar banknotes to the country and spearheaded a drive to freeze Russian assets abroad. That’s when the international press started buzzing about how the sanctions left other central banks wondering whether their own dollar-denominated funds would also be locked up should their governments ever run afoul of Washington.
Yet even though the last year or so has seen increased diversification of international trade out of the dollar, especially among BRICS countries, there’s really no alternative to the dollar as the global reserve currency in the foreseeable future. For, each time there is a real international crisis — regardless of whether it is confined to financial markets — investors hunt for safety.
And there was no better example than the historic great crash of 2008 to prove that the ultimate safe haven trade is US government treasuries, which mandates a rush into the dollar.
Ordinarily, a crash that originated in the US should have led to investors dumping US securities and the dollar, but instead it proved the overwhelming dominance of the US market and smart money from all over the world flocked to the US bond and currency markets.
The main reason is that America is still the only country that provides unparalleled liquidity, depth of financial markets and rule of law where even government institutions can be challenged. Other pretenders to the global currency throne such as the Euro, Chinese Yuan and Japanese Yen, can boast one or two, but not all of these qualities. So, while de-dollarisation is not entirely a myth, it is still far from an immediate reality.
The dollar’s role may evolve, but its dominance — for now — remains anchored in its unparalleled stability and global trust. Policymakers worldwide must balance aspirations for financial independence with the realities of an interconnected economic system that continues to pivot around the greenback.
Copyright Business Recorder, 2025
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