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On April 26th, 2023, Sergio Massa, Argentina’s Economy Minister made an announcement stating that his country would now pay for imported goods from China in Chinese Yuan instead of US dollars. Several months prior to this announcement, the Finance Minister of Saudi Arabia had also expressed openness to conducting business in currencies other than the US dollar. During a meeting of BRICS (Brazil, Russia, India, China, and South Africa) economies held in March of this year, the development of a common currency to promote mutual trade was discussed. These global developments have prompted economists worldwide to begin discussing the process of de-dollarization. This article examines how the US dollar’s dominance was established over the past century, its current decline, and possible alternatives.

The history of the dollar’s ascendancy

While the US dollar became an important international currency after World War I, its establishment as the world’s reserve currency came at the end of World War II. The Great Depression of 1929-39 highlighted the need for government support to provide economic stability, growth, and employment. The formation of an international financial institution to promote economic stability and political peace became imperative. In 1944, representatives from 44 different countries met at the Mount Washington Hotel in Bretton Woods, New Hampshire, USA, to finalize the creation of an international economic system that could support economies devastated by World War II. This led to the establishment of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), now known as the World Bank. During the Bretton Woods meeting, countries agreed to peg their currencies to the US dollar.

This decision was influenced by the fact that the US had supplied arms and ammunition to various countries during the war, and most payments were made in gold. Consequently, the US became the world’s largest holder of gold, which facilitated the US dollar’s rise as the world’s reserve currency. It was also decided that countries accepting the hegemony of the dollar would have the ability to adjust the value of

their currency against the dollar within certain limits, if necessary. Prior to the Bretton Woods meeting, many countries followed the gold standard as their exchange rate system, determining currency exchange rates based on gold availability. Under the Bretton Woods system, the US dollar was pegged to gold at a fixed rate of $35 per ounce, while other currencies were pegged to the US dollar but remained adjustable. Thus, the US dollar emerged as an international currency and its dominance was established.

This international system continued until the 1960s. During this period, US President Lyndon Johnson increased domestic spending in an effort to position himself as a leader. The Vietnam War had already led to high military spending, which increased the demand for the US dollar. As many European banks had also loaned dollars, this necessitated the printing of additional dollars by the American Central Bank, resulting in a shortfall of gold reserves compared to the supply of dollars. By the 1970s, the situation had reversed, with increased inflation leading many economies to demand gold in exchange for dollars to combat inflation. To address the complexities, US President Nixon announced the decoupling of the US dollar from gold. However, by that time, the US dollar had firmly established itself as an internationally accepted currency. According to statistics released by the International Monetary Fund (Global Financial Stability Report, 2022), as of March 2022, approximately 55% of the total international foreign exchange reserves held by central banks worldwide were in US dollars. In 2019, before the onset of the COVID-19 pandemic, the US dollar accounted for 88% of global trade.

Recently, the US dollar has gained significant strength against major currencies due to the Russia-Ukraine war. The war disrupted the movement of essential goods, leading to a surge in inflation worldwide. Developed economies such as the USA, England, Canada, Australia, and the European Union experienced unprecedented levels of inflation. As the US Federal Reserve began increasing interest rates to curb inflation, it had negative effects on the currencies of other economies, particularly developing economies. The increase in US interest rates attracted additional investments from global investors but reduced foreign investment in developing economies. Foreign investors who had invested in developing markets withdrew capital from banks and stock markets in those economies. It is worth mentioning that interest rates in many developed economies before 2022 ranged between 0% and 1%.

To shield their currencies from the impact of increasing US interest rates, central banks in developing countries also started increasing their own interest rates. This resulted in a “currency war” where each increase in US interest rates forced other economies to raise their interest rates as well. These repeated interest rate hikes not only decreased foreign investment in developing economies but also made debt more expensive and repayment costlier. As a result, start-ups and entrepreneurs defaulted on loan payments and resorted to layoffs to cover losses. Since 2007, cheap loans have been available due to low interest rates, allowing businesses and governments in developing economies to acquire cheap loans from developed nations. However, with the increase in interest rates to combat inflation caused by the Russia-Ukraine war, financial crises unfolded as loan repayment became challenging. Overall, the increase in interest rates strengthened the US dollar, sending shockwaves through the financial world. Consequently, discussions on de-dollarization or the replacement of the US dollar have gained popularity across various major platforms.

Yuan as an alternative

Given that no other currency has yet achieved the level of development of the US dollar, central banks worldwide are currently considering gold as a safe alternative. Data reveals that central banks purchased around 455 tonnes of gold in 2021, which increased to 1136 tonnes in 2022. Simultaneously, discussions are underway regarding the development of other currencies that could challenge the dominance of the US dollar, with China’s Yuan at the forefront. A closer analysis reveals that Chinese authorities have made significant efforts to establish the Yuan as a leading global currency. The prevailing circumstances also favor the Chinese Yuan.

In 2015, the People’s Bank of China established a cross-border inter-bank payment service, which received wide acceptance from major international banks such as Citibank, HSBC, JP Morgan Chase, and others. This service aims to facilitate international transactions using the Yuan or Renminbi. It places China on par with the US interbank payment system. In 2016, China successfully included the Yuan in the basket of Special Drawing Rights (SDR) of the International Monetary Fund. Prior to this, only four currencies—the US dollar, the euro, the yen, and the British pound—were part of the SDR. SDRs are not a currency in themselves, but rather an asset that can be converted into currency by any country holding it, if needed. According to the Society for Worldwide Interbank Financial Telecommunications (SWIFT), the Yuan is now the most widely used currency for global payments after the US dollar, euro, British pound, and Japanese yen. Following Russia’s military attacks on Ukraine, the former faced severe sanctions from the international community. However, Russia improved its ties with China, and now the Yuan has overtaken the US dollar as the most used foreign currency in Russia. Additionally, China has established trade agreements with countries like Kazakhstan, Pakistan, Laos, and Brazil that allow the use of the Yuan instead of dollars. Recently, Saudi Arabia announced that it will begin trading oil with China in Yuan. Iran, which had been an observer in the Shanghai Cooperation Organization (SCO) for several years, expressed its desire to become a full member. As Russia, Saudi Arabia, and Iran are major crude oil producers, an agreement to accept Yuan payments for crude oil imports could threaten the dominance of the dollar, at least in Asia. In an article published in Harvard Business Review (2020), Sebastian Horn, Carmen Reinhart, and Christoph Trebesch highlighted that the Chinese government and its subsidiaries have provided approximately $1.5 trillion in direct and indirect debt to over 150 countries. This has made China the world’s largest official creditor, surpassing even traditional lenders like the World Bank and the International Monetary Fund. China has agreed to partially waive off this debt on the condition that these economies use the digital Yuan for all international commerce, trade, and financial payments. In this way, China is attempting to establish the (digital) Yuan as the currency of choice for the central banks of the world’s fastest-growing economies.

Rupee as an alternative

In the Indian context, the State Bank of India, in its latest Ecowrap report, has recommended accelerating efforts to “internationalize” the Indian Rupee to manage capital outflows and currency depreciation. The “internationalization” of the Rupee can also be seen as a step towards “de-dollarization” or reducing the dominance of the US dollar in international trade. Through a notification dated July 11, 2022, the Reserve Bank of India allowed invoicing and payments for international trade to be conducted in Indian Rupees. Additionally, the Reserve Bank of India has signed currency swap agreements with several countries, enabling the exchange of Rupees and foreign currencies between the central banks of two nations. Recently, the Indian government also permitted Indian companies to issue Rupee-denominated bonds in the international market, which will help increase the demand for the Indian Rupee. Furthermore, the Indian government has signed bilateral trade agreements with other countries, facilitating cross-border trade and investment. These measures are expected to enhance the use of the Indian Rupee in international transactions. However, despite these efforts, much more needs to be done to fully “internationalize” the Indian Rupee.

India also needs to be prepared to face adverse situations. Recently, Russian Foreign Minister Sergey Lavrov announced the discontinuation of the Rupee settlement mechanism between Russia and India. He explained that Russia had “deposited billions of Rupees in Indian bank accounts,” and to use this money, the Rupee would need to be converted into another currency. This development dealt a significant blow to India’s efforts to establish the dominance of the Rupee in the international market. Additionally, the Indian government should refrain from repeated demonetization of currency notes, as it creates a negative impression among international businessmen, traders, and investors. India might be the only economy in history where high-denomination currency notes have been withdrawn from the market within a span of 5-6 years. Before gaining the confidence of the international community, the Indian government needs to have full faith in its own currency.

In conclusion, while efforts are underway to replace the US dollar as the reserve currency with another currency, it will take time for these plans to materialize. However, the challenges posed by various economies to the hegemony of the dollar indicate that the clock is ticking on the dollar’s reign.