De-dollarization, the decline of the United States dollar as the world’s dominant reserved currency, is underway, and it’s gaining momentum. For over 100 years, the U.S. dollar has been the world reserve currency, which means it has been the dominant foreign currency held by central banks to carry out international transactions and settle international debt. However, in the last 20 years, the dollar’s dominance in countries’ reserves has decreased from 70% to under 60%, according to the International Monetary Fund.
This trend has been accelerating since last year, when the U.S. and its allies froze Russia’s dollar reserve as a response to the country’s invasion of Ukraine. Since then, several countries have been looking for alternatives to the U.S. dollar. Some are discussing the creation of new currencies for international trade, while others are buying an increasing amount of gold to diversify their reserve. Bitcoin, a nascent asset with many of the characteristics of gold, may also benefit from this trend in the long run.
The decline of the U.S. dollar could have both positive and negative implications for various assets and markets. On one hand, the transition to alternative reserve currencies could create instability in financial markets and cause fluctuations in exchange rates. On the other hand, the shift away from the U.S. dollar could open up opportunities for other assets, such as gold and cryptocurrency, to take a more prominent role as reserve currencies.
The de-dollarization trend carries a two-fold risk: firstly, the transition from a U.S. dollar-based global financial system to a more diversified monetary regime could have serious consequences for global markets and financial stability. This is partially due to the uncertainty associated with the transition process and the potential for disorderly adjustments in asset prices and exchange rates.
Secondly, the challenges presented by de-dollarization could lead to the entrance of alternative and disruptive forms of money, such as cryptocurrencies. While innovative and often hailed as the future of finance, cryptocurrencies are not without their limitations. They are volatile, prone to hacking, and have been associated with illicit activities. Furthermore, the widespread adoption of cryptocurrencies as reserve currencies could take power away from central banks, possibly leading to concerns about governability and economic stability.
In conclusion, de-dollarization is a complex and multifaceted issue, and its implications are still uncertain. Although it may open up opportunities for other assets, it also carries significant risks that could impact the stability of the global financial system. As the world continues to assess the future of the U.S. dollar and its role as the dominant global reserve currency, it is crucial to carefully consider the potential consequences and opportunities that may arise from this ongoing shift.
Source: Cointelegraph
