The US dollar has dominated world trade and capital flows for many decades.
However, like Visual Capitalist’s Bruo Venditti details below, many countries are looking for alternatives to the greenback to reduce their dependence on the United States.
This chart lists the rise of the US dollar as the dominant international reserve currency and recent efforts by various countries to de-dollarize and reduce their dependence on the US financial system.
The dominance of the dollar
The United States became, almost overnight, the leading financial power after the First World War. The country only entered the war in 1917 and emerged much stronger than its European counterparts.
As a result, the dollar began to replace sterling as the international reserve currency, and the United States also became a major recipient of wartime gold inflows.
The dollar then gained a more prominent role in 1944, when 44 countries signed the Bretton Woods Agreementcreating a collective international exchange rate pegged to the US dollar which was, in turn, pegged to the price of gold.
In the late 1960s, European and Japanese exports became more competitive with American exports. There was a large amount of dollars in the world, which made it difficult to back dollars with gold. President Nixon ended the direct convertibility of the US dollar into gold in 1971. This ended both the gold standard and the limit on the amount of money that could be printed.
Although it remained the international reserve currency, the US dollar increasingly lost its purchasing power Since.
The steps of Russia and China towards dedollarization
Concerned about US dominance over the global financial system and the country’s ability to ‘militarize’ this, other nations have tested alternatives to reduce dollar hegemony.
As the United States and other Western countries imposed economic sanctions on Russia in response to its invasion of ukraineMoscow and the Chinese government have been teaming up reduce dependence on the dollar and establish cooperation between their financial systems.
Since the 2022 invasion, ruble-yuan trade has increased eighty-fold. Russia and Iran are also working together to launch a gold-backed cryptocurrency, according to the Russian news agency Vedmosti.
In addition, central banks (especially those in Russia and China) have bought gold at the fastest pace since 1967 as countries strive to diversify their reserves away from the dollar.
How other countries are reducing their dependence on the dollar
De-dollarization is a theme in other parts of the world:
- In recent months, Brazil and Argentina have discussed creating a common currency for South America’s two largest economies.
- At a conference in Singapore in January, several former Southeast Asian officials spoke on ongoing dedollarization efforts.
- The United Arab Emirates and India are in talks to use rupees for trade non-oil commodities in a move away from the dollar, according to Reuters.
- For the first time in 48 years, Saudi Arabia has declared the oil-rich nation a open trading in currencies other than the US dollar.
Despite these moves, few expect to see the end of the dollar’s global sovereign status soon. Currently, central banks still hold about 60% of their foreign exchange reserves in dollars.
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