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- 1 De-dollarization suggests reducing the dependency on dollars.
- 2 It potentially recommends less reliance on U.S. dollars.
De-dollarization shows the decline in possession. Although the dollar is the strongest currency in the world, the dependency of all nations on this currency is a matter of concern. This concern arises after noticing the deep trust in the currency due to its value.
De-dollarization is the process by which countries are trying to lessen their dependency on dollars by looking for alternative methods of conducting foreign trade and financial transactions. The central banks are opting to diversify their currency holdings and encouraging the use of other currencies in cross-border transactions.
Undoubtedly, dollars are used especially in cross-border transactions as it is considered optimal for making global payments. But, de-dollarization came into vast realization when it is assumed that what if the value of U.S. dollars declines? It will affect worldwide trade, financial stability, and trade.
Countries Favoring De-Dollarization
The minute fluctuations in the value of the dollar show a huge effect on the domestic and international markets. This suggests the need for de-dollarization. The countries are now ready to make changes to protect themselves from the losses arising due to dependency on dollars.
Businesses and governments are looking for alternatives and options to provide stability. Due to this, regional currencies are gaining benefits. This also highlights the need for more secure and diverse monetary systems.
De-dollarization clearly brings attention to the usage of regional currency or digital currency. This will rule out the dominance of dollars and countries with more flexibility and resilience in their financial systems.
Some countries supporting and implicating de-dollarization are Russia, China, Iran, EI Salvador, European Union, and Venezuela. These countries are giving preferences to native currencies in cross-border trades and transactions. They are supporting de-dollarization to avoid economic hardships and American sanctions. El Salvador is using digital currency instead of transactions and trade.
Pros and Cons of De-Dollarization
De-dollarization has some profits and losses as well. The export competitiveness increases as now the countries that are deficit can trade their goods in local currencies. This leads to growth in competitiveness.
It will also lead to increased tourism and foreign investments. As the local currency is cheap, it is beneficial to trade. It will benefit debt repayments. If the debt is taken in foreign currency, then its repayment in native currency becomes easy.
De-dollarization has some drawbacks as well. It will increase the cost of import, investment uncertainty, and challenges with debt servicing, and also impact on the standard of living. The depreciation in the currency will lead to an increase in the price of imported items. Similarly, challenges will arise in debt servicing as the loan has to be repaid in depreciated currency. As the imported things prices will increase which leads to a lower capability of buying due to higher prices this will affect the standard of living.
Summary
De-dollarization is considered a way of reducing the risks attached to U.S. dollars. It will also promote the stability of native currencies and financial systems. Finally, it will reduce the dependency of nations on dollars.
Mr. Pratik chadhokar is an Indian Forex, Cryptocurrencies and Financial Market Advisor and analyst with a background in IT and Financial market Strategist. He specialises in market strategies and technical analysis and has spent over a year as a financial markets contributor and observer. He possesses strong technical analytical skills and is well known for his entertaining and informative analysis of the Financial markets.
