The world is going through a rapid transition in recent times, especially since the Russia-Ukraine war started. Europe is facing a devastating war experience for the first time since the end of World War II. From economic dominance to interstate relations, a new polarisation has emerged due to the war. At this point, when the entire world is undergoing economic crisis and inflation, question arises whether the US dollar will lose its hegemony in the future.
DOLLAR DOMINATED WORLD: The dollar became the official reserve currency of the world in 1944 when 44 allied countries made an agreement called the Bretton Woods Agreement. Since then, the US dollar has dominated the world and has been used exclusively as a foreign reserve worldwide. Most of these reserves are held in the U.S. dollar as it's the most traded currency. Today, most financial transactions, international debt, and global trade invoices are denominated in dollars and the dollar comprised close to 60 per cent of globally disclosed official foreign reserves in 2021. It resulted from the large supply of extremely safe dollar-denominated assets. The United States is the premier producer of safe assets that act as stores of value for the world's savers. Of the US$16.1 trillion in publicly held US Treasury securities, foreigners hold a 39 per cent share.
For most of the last century, the preeminent role of the U.S. dollar in the global economy has been supported by the size and strength of the U.S. economy, its stability and openness to trade and capital flows, strong property rights and the rule of law. As Adam Posen has observed, "the United States' political leadership in security, commercial and even cultural affairs globally have a critical impact on the usage of the dollar in the monetary realm".
Along with the dollar, some other currencies are also used as forex reserves, whereas the euro has 21 per cent, the Japanese yen 6 per cent, the British pound 5 per cent, and the Chinese renminbi a 2 per cent share of the global forex reserve. Currently, the share of USD in global forex reserves is 60 per cent, which has declined from 71 per cent of reserves in 2000. It implies a sharp decline in the dominance of the USD in the last 2 decades. Although the decline is slow and gradual, the dollar's share of foreign-exchange reserves and trading has trended downward, particularly since the turn of the century.
WEAPONISATION OF DOLLAR: Since the dollar has enjoyed a powerful status in the world, it has given the US a disproportionate amount of influence over other economies. The negative effect of dollar hegemony is also going forward. It also utilises the international payment system known as SWIFT. SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. Despite years of current account deficit, a high debt-to-GDP ratio and, the dollar still holds its dominance as the world's leading currency due to the lack of any viable alternative.
The US weaponised the dollar many times to punish its rivals in course of history. A remarkable example is the Trump administration's enforcement of economic sanctions against Iran in an attempt to shut the country out of the international banking system, and in particular, SWIFT. To punish Russia for its invasion of Ukraine, western governments froze $300 billion of Russia's foreign currency reserves last year, roughly half the total, and expelled Russian banks from the Swift international payments system. In 2014 and 2015, the US also blocked several Russian banks from SWIFT and threatened China to sanction from SWIFT more recently.
TOWARDS DE-DOLLARISATION PROCESS: For several reasons, the entire world, even many US allies, are considering moving toward a new exchange system. This is being called the de-dollarisation process. The US-centric unipolar world's transition into a multipolar world, with the rise of new economic powers such as China, India, and Brazil, has played a significant role in the de-dollarisation trend. As the global economy has become multipolar, there has been a growing desire among these countries to reduce their dependence on the US dollar and to assert their influence on the international monetary system. These resulted from the weaponisation of the dollar and distrust on it due to geopolitical risks, cyclical liquidity risks, and inflationary crises created by the dependence on a single dominant currency.
Consequently, a number of countries, including China, Russia, and Iran, have taken steps to limit their dependence on the dollar and have even been working to establish alternative payment systems. Specifically, BRICS, a five-nation bloc of Brazil, Russia, India, China, and South Africa, is playing a leading role to establish an alternative exchange currency. They are working on establishing a new reserve currency based on a basket of the currencies of the five countries to better serve their economic interests. As a part of enabling a reserve currency to be created, the BRICS is set to build a joint financial infrastructure. More countries are joining this initiative, shifting to use national currencies as alternative exchange currencies more and more.
Brazil and China are now trading with each other in yuan, helping to establish the Chinese renminbi as an international currency and dollar challenger. Countries willing to continue to trade with Russia, like India and China, have started doing so in rupees and yuan instead, triggering talk of the de-dollarisation of the international trading order. There is a possibility of attracting the BRICS basket currency as reserves not just of the group's members, but also countries already in their range of influence. These include nations in South Asia and the Middle East. At the beginning of March, the Eurasian Economic Union -- which brings together Russia, Armenia, Kazakhstan, Kyrgyzstan and Belarus -- reached an agreement on the need to develop a new international currency. According to the latest report, 25 countries are now ready to join BRICS and accept the new currency for international trade. This implies clearly that the dollar is losing its dominance in the multipolar world.
BANGLADESH'S STRATEGY: Since the beginning of the Russia-Ukraine war, like other developing countries, Bangladesh's foreign exchange reserves have been decreasing. Higher import cost leads to an inflationary crisis, which increases pressure on forex reserves. This in turn left the nation in energy and food shortages. Moreover, the central bank had to sell more than $20 billion dollars of its net forex reserves over the last two financial years due to an imbalance in the forex market. The taka has depreciated by more than 30 per cent against the US dollar over the last couple of years. As a result, Bangladesh, like many other countries, is interested in doing business in local currency
Last month, Bangladesh and Russia agreed to pay the first installment of the Rooppur nuclear power plant, equivalent to about $320 million, in Chinese currency yuan, as a result of Russia's exclusion from the SWIFT gateway. The Bangladesh Bank has been building up the share of yuan in its foreign exchange reserve, cutting down the share of the dollar as the Chinese currency is gaining acceptance faster in global markets for international payments as an alternative to the greenback.
Being a large economy, India's rupee also has an increasing trend of trade. Recently, 18 countries, including the UK, Germany, Russia, and even the United Arab Emirates, have been given permission to trade in Indian rupees. Bangladesh is the latest addition to this list as the 19th country. China and India, two of the world's largest economies, are Bangladesh's largest trading partners. Apart from the economy, the two countries have become influential players in geopolitics as well. However, it will not be easy for a growing economy like Bangladesh to maintain a diversified forex currency instead of the dollar, which has dominated the world for a long time. As a result, careful consideration of long-term benefits and sustainability is a must before any new move.
Abdullah Sadi is a Researcher on South Asian political Economy and International Politics.
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