Recently, a handful of countries worldwide are stepping away from the US dollar.
But de-dollarization scares aren’t anything new. Many financial experts have been predicting the dollar to fall from grace for years.
Yet this time, something feels different. Countries like China have been taking steps to use their own currencies for trading over the US dollar. In LATAM, Argentina and Brazil discussed creating a future common currency.
With all these events happening simultaneously, is the US dollar in trouble? Let’s dive into our recent de-dollarization crisis and how it can impact your finances.
What Is De-Dollarization?
So how does de-dollarization actually work? Let’s look at some history.
Since WW2, the US has been the world’s primary reserve currency and is used in most foreign trades worldwide. Most countries also use the greenback to service any foreign debts or use it as part of their reserves.
By having an international system around the US dollar, there’s a steady demand for it wherever you are. It also gives Americans enormous privileges when it comes to borrowing and spending compared to other countries.
However, the dollar’s been losing its edge for years. From a high of 71% in 2000, the greenback has fallen to under 60% today.
As countries diversify their currency holdings and reduce their dependence on the dollar, de-dollarization may become a reality.
Why Are More Countries Moving Away From The Dollar?
Several issues have caused the most recent shift away from the dollar.
For starters, we’re dealing with a less-than-rosy financial outlook. The Fed has been doing everything it can, hiking rates to the highest levels in decades.
Higher rates make borrowing and paying off debt harder for foreign governments, especially those in the developing world.
Things have changed significantly since the dollar became the world’s reserve currency.
Back then, the US was the only superpower. But now, many countries have caught up and want to decrease their dependence on the US dollar, especially ones with massive economies like China or India.
The Ukraine war and the following sanctions also caused countries to question the dollar’s reliability. Some even took these actions as “ currency weaponization” and moved away from the greenback.
How De-Dollarization Could Affect Our Economy
If de-dollarization happened tomorrow, we’d be in some serious trouble. Here’s how it could affect your wallet:
If demand for US dollars dries up, this will leave more cash in circulation than people need.
A situation like this would cause the dollar to drop in value, at least in the short term. Everything from buying household goods, building up a rainy day fund, or paying off your debt would become a challenge–almost overnight.
On the other hand, a lower currency would make American exports cheaper, potentially bringing jobs and reviving specific industries.
Rise of Alternative Currencies
Talks of de-dollarization have also brought the discussion of crypto and government-backed digital currencies to the spotlight.
As the dollar becomes irrelevant, these alternative currencies could become widely accepted for trade and as a store of value. Once this system becomes widespread, it’ll be the final nail in the coffin for the dollar in the global financial system.
High-Interest Rates Will Be The New Normal
If you think our interest rates are alarming now, it could be much worse if the dollar loses its edge as the world’s reserve currency.
The higher the inflation rate, the more aggressively the Fed could respond when raising rates and attempting to stabilize the dollar.
And we’re not talking half a percentage point here and there. Rates well into the double digits, as we had a few decades back, would be commonplace.
We’d be dealing with higher mortgage rates and expensive loans that would’ve been unthinkable before de-dollarization.
Is The US Dollar On Its Way Out?
Despite de-dollarization becoming a hot talking trend recently, the US dollar has a long way to go before anything like this happens, if it happens at all.
The greenback is still the most widely used currency in the global FX market and international trade.
And barring recent issues, most people still see the US dollar as a safe haven worth investing in.
However, you can’t deny that the global financial landscape is changing. As countries become more invested in exploring other currencies to diversify their reserves, a de-dollarized future isn’t entirely out of the picture.
Keeping an eye on this trend and diversifying your financial portfolio will help you prepare for any shifts in the global economy.