3 reasons countries around the world want to break up with the dollar (2024)

FAQs

3 reasons countries around the world want to break up with the dollar? ›

The US dollar has been the world's reserve currency for decades, but its dominance is fading. Sanctions against Russia have spurred other countries into considering backup currencies for trade. US monetary policies, the strong USD, and structural shift in the global oil trade also contribute.

The US dollar has been the world's reserve currency for decades, but its dominance is fading. Sanctions against Russia have spurred other countries into considering backup currencies for trade. US monetary policies, the strong USD, and structural shift in the global oil trade also contribute.

This is an effort by a growing number of countries to reduce the role of the U.S. dollar in international trade. Countries like India, China, Brazil, Malaysia and Bolivia, among others, are seeking to set up trade channels using currencies other than the almighty dollar.

Countries that peg their currency to the dollar do so because the U.S. dollar is the world's reserve currency and is relatively strong in the international market. As such, transactions and any international trade that takes place often happens in U.S. dollars. This helps keep a country's pegged currency stable.

Many countries cannot borrow money or pay for foreign goods in their own currencies—since much of international trade is still done in dollars—and therefore need to hold reserves to ensure a steady supply of imports during a crisis and assure creditors that debt payments denominated in foreign currency can be made.

It's increasingly clear that, as non-western countries assert themselves in the world's economic arena, geopolitical divisions with the west will cause additional friction. As a result, the US dollar's role is almost certain to become more limited than it has been at any time since the end of the second world war.

Some say it will be the euro; others, perhaps the Japanese yen or China's renminbi. And some call for a new world reserve currency, possibly based on the IMF's Special Drawing Right or SDR, a reserve asset. None of these candidates, however, is without flaws.

In the event of a dollar collapse, diversification becomes a critical strategy for safeguarding assets. Relying solely on fiat money, such as the United States dollar, Euro, or the Japanese yen, exposes investors to the risk of inflation and depreciation, eroding the purchasing power of their savings.

Japan continues to be a popular choice, but Vietnam and South Korea stand as solid alternatives among numerous countries in Asia with favorable exchange rates for the US dollar. Closely following in value are South American countries: Argentina and Chile are among those offering the biggest luxury bang.

There is no reason to expect the U.S. dollar to collapse in the near future.515 Such a change would require the entire world to change its adherence to an international monetary system that has the greenback at its center. As yet, no replacement is anywhere on the horizon.

What are the problems with dollarization? ›

Dollarization carries with it the risk of a loss of autonomy for a developing country that adopts it. When a country does not build and develop its own currency, it runs the risk of allowing its monetary policy controlled by a foreign country.

Many countries, though, chose to maintain a fixed policy, and today, there are still a significant number of currencies pegged to the U.S. dollar. Countries peg to ensure their goods and services remain competitive instead of being negatively impacted by the constant fluctuation of a floating currency's exchange rate.

A weak currency may help a country's exports gain market share when its goods are less expensive compared to goods priced in stronger currencies. The increase in sales may boost economic growth and jobs while increasing profits for companies that are conducting business in foreign markets.

The Kuwaiti Dinar (KWD), recognized as the highest-valued currency globally, symbolizes Kuwait's economic strength.

Despite some recent announcements of countries bypassing use of the dollar in trade contracts, the U.S. dollar remains dominant as the currency of choice for international transactions.

A falling dollar diminishes its purchasing power internationally, and that eventually translates to the consumer level. For example, a weak dollar increases the cost to import oil, causing oil prices to rise. This means a dollar buys less gas and that pinches many consumers.

If the Federal Reserve creates money and the U.S. government assumes and monetizes debt faster than the U.S. economy grows, the future value of the currency could fall in absolute terms. Fortunately for the U.S., virtually every alternative currency is backed by similar economic policies.

NEW YORK/LONDON, May 17 (Reuters) - The dollar retreated against major currencies on Friday as market speculation continues to swirl about the timing of Federal Reserve interest rate cuts amid signs of cooling yet persistent inflation and a softening U.S. economy.

By reducing their reliance on the US dollar, countries can have more flexibility in setting interest rates and managing money supply to address their specific economic conditions and goals. Exchange rate fluctuations: De-dollarization can have significant implications for a country's exchange rate.

The impact would be most acutely felt in the U.S., where de-dollarization would likely lead to a broad depreciation and underperformance of U.S. financial assets versus the rest of the world.