Over the last few centuries, the popularity of different reserve currencies has varied, reflecting the shifting fortunes of leading global economies. In the recent past, the US displaced the UK economically and as well as the world’s reserve currency
Today, the US economy is showing signs of slowing down, with other economies, especially China and India, catching up fast. Additionally, increased trade wars and sanctions by the US have accentuated the search for a new trade mechanism other than the US Dollar
Amid the unending Ukraine conflict, the unilateral US-led Western sanctions on Russia have led nations like India and China to move away from trading in American dollars, the world’s ‘reserve currency’
India is making an effort to try and make the rupee an ‘international currency’ on par with the dollar and the rest. Trading in the Indian rupee has its advantages for both India and its trading partners
The search for another reserve currency has been giving wind to the de-dollarization thesis, which refers to countries reducing reliance on the US dollar as a reserve currency, medium of exchange or as a unit of account
De-dollarisation is a process of substituting the US dollar as a primary currency used for trading oil and/ or other commodities (i.e. petrodollar), buying US dollars for the forex reserves, and bilateral trade agreements. Here's a look at how the US dollar gained dominance and then declined in the last 100 years
In 1920, the US dollar began to displace the pound sterling (GBP) as an international currency after the First World War as the United States was the significant recipient of the wartime gold flows courtesy of increased exports to war-struck Europe
In 1944, the Bretton Woods Agreement established the postwar international monetary system, with the US dollar ascending to become the world's primary reserve currency for international trade, and the only post-war currency linked to gold at $35 per ounce
In 1970, petrodollar emerged as an economic concept as growing US imports of increasingly costly crude oil increased the dollar holdings of foreign producers. In 1971, President Nixon ceased the direct convertibility of US dollars to gold
In 1981, after years of hyperinflation, the US dollar lost two-thirds of its purchasing power. In 2014, Russia prioritised de-dollarization following the annexation of Crimea in response to Western sanctions
China has been gradually shifting from trade in the US dollar, and in favour of the Chinese yuan since 2011. In March 2018, China started buying oil in gold-backed yuan
In 2022, Japan, the largest holder of US debt, followed by China, pared back holdings of US Treasuries to multi-year lows. Central banks bought gold at the fastest pace since 1967 as countries diversify their revenues away from the dollar. The war in Ukraine resulted in Western sanctions against Russia. As a result, Russia and China deepened cooperation between their financial systems with ruble–yuan trade settlement
Russia is leading the de-dollarization campaign from the frontline with support from China, Iran, and economies in Latin America. Russia has already offloaded $80 billion in US securities
RBI has allowed International Trade Settlement in Indian Rupees (INR) to facilitate trade with partners. This initiative by RBI is aimed at facilitating the growth of global trade and supporting the interests of the global trading community in INR
In FY19, India imported crude oil from Iran using the rupee based mechanism. Recently, India and Malaysia have agreed to settle trade in INR. Apart from these, about 35 nations have expressed an interest in learning more about how the rupee trade mechanism works
India, Russia and China are spearheading talks of development of a new currency that can be used for cross-border trade by these BRICS nations. On a combined GDP scale, these nations would not only outpace the US but the entire G-7, making a strong fundamental case, according to Ambit Asset Management