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De-dollarization and Global Geopolitics

~Devansh Agarwal and Ekampreet Kaur


De-dollarization refers to the process by which a country reduces its reliance on the US dollar in domestic and international transactions. Countries may pursue de-dollarization for various reasons, including reducing vulnerability to external economic shocks, enhancing monetary policy autonomy, and promoting financial stability. 

De-dollarization often involves diversifying foreign exchange reserves, encouraging alternative currencies in trade agreements, and developing local currencies for international transactions. Ultimately, de-dollarization reflects a country's strategic efforts to assert greater control over its monetary and economic policies by reducing dependence on the US dollar.

History of Dollar Dominance 

“The risk of de-dollarization, which is a periodically recurrent theme throughout post-war history, has returned into focus due to geopolitical and geostrategic shifts. 

  • 1920: the dollar began to replace the pound sterling as an international reserve currency after the First World War. 

  • 1944: International trade is conducted using the dollar under the Bretton Woods Agreement 

  • 1960s: European and Japanese exports become more competitive with U.S. exports. There is a large supply of dollars in the world, making it difficult to back it with gold.

  • 1971: President Nixon ceases the direct convertibility of Dollars into gold 

  • 1990s: Countries like Chile, Israel, and Poland introduced disinflation and macroeconomic stabilization programs. A by-product of these policies was a change in the composition of foreign currency reserves of these countries, prompting de-dollarization 

  • 2007-2008: Investors seek US dollars during the financial crisis expecting it to retain its value. The crisis which had largely originated from the US had prompted countries around the world to rethink their dependence on US dollars. 

  • 2014: Following the annexation of  Crimea, Russia prioritizes de-dollarisation in response to Western sanctions. 

  • 2022: Central Banks buy gold at the fastest pace since 1967 since countries seek to diversify their reserves away from dollars. The war in Ukraine resulted in  Western sanctions against Russia. As a result, Russia and China deepen cooperation between their financial systems, with rubble-yuan trade increasing 80 by x in eight months. 

  • 2023: Brazil and Argentina discuss the creation of a common currency. 

India and UAE explore the use of rupees to trade non-oil commodities. 

Russia and Iran are working together to launch a cryptocurrency backed by gold.  

Initiatives taken by India

India has introduced several measures to help mitigate the risks that come associated with dependence on dollars and to circumvent the sanctions imposed by the US. The initiatives taken are as follows:

  • RBI allowed trade with 18 countries using rupee

  • Discussions to introduce a common currency for trade between BRICS nations and an invitation to Argentina, Egypt Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates to join BRICS  

  • Agreement to purchase Russian oil using dirham 

  • Diversification of foreign reserves 

  • Introduction of technologies like nostro-vostro account as an alternative for the SWIFT payment settlement method. 

China’s angle

Belt and Road Initiatives: By promoting the use of the RMB in trade and investment along BRI routes, China seeks to establish a more diversified and multipolar global financial system, thereby strengthening the RMB's role in international transactions and diminishing dependence on the dollar.

Currency Swap: China is actively establishing bilateral currency swap agreements with various nations, facilitating trade and investment in RMB.

Gold Reserve: China has been augmenting its gold reserves, a measure to enhance the RMB's credibility as a store of value.


Political Implications 

Dollarization has deep and far-reaching implications which include but are not limited to:

  • Global Institutions: It may also impact the functioning of international financial institutions like the World Bank that have traditionally relied on the US dollar as the primary currency for settlements and lending.

  • World power: De-dollarization carries the potential to reshape the global power dynamic. By diversifying their currency holdings, these countries can strengthen their bargaining power and negotiate more favorable terms in economic transactions.

  • Economic sanctions: De-dollarization presents significant implications for the global influence of the United States. As the international prominence of the US dollar diminishes, the effectiveness of using economic sanctions as a tool for coercive diplomacy and the ability to finance its deficit may be reduced. 


De-dollarization faces several challenges that can complicate the process for countries attempting to reduce their reliance on the US dollar.

1. Market Confidence and Stability: De-dollarization efforts can be met with skepticism from global markets, potentially leading to volatility and uncertainty. Investors may be hesitant to adopt alternative currencies, fearing instability in the transition, which could impact exchange rates and market confidence.

2. Exchange Rate Risks:  Shifts away from the US dollar may expose a country to exchange rate risks, as the value of alternative currencies can be subject to fluctuations. Managing these risks requires careful planning and effective monetary policies to maintain stability.

 The availability and liquidity of alternative currencies play a crucial role in de-dollarization. If local or regional currencies lack sufficient liquidity, businesses may face challenges in conducting transactions, hindering the adoption of non-dollar currencies.


In conclusion, de-dollarization demands meticulous strategy and collaboration. Addressing hurdles like market confidence, exchange rate stability, and viable alternative currencies is imperative for a smooth shift from reliance on the US dollar. This intricate process underscores the need for careful planning and coordinated efforts among policymakers and stakeholders. While challenges loom, embracing diversity in currency usage fosters resilience and autonomy in global economic systems.

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