Dollar Hegemony: De-dollarization efforts and the threat of the BRICS currency proposal

The US dollar has dominated the global economy for decades. Not only is the currency the main medium of international trade and investment, but the dollar also accounts for more than 60% of the foreign exchange reserves of central banks. However, in the last few years, countries like Russia, China, India, Brazil and South Africa (BRICS countries) have seen a sharp decline in the US dollar hegemony. The BRICS has taken concrete steps to reduce dependence on the dollar. These efforts are called “de-dollarization.” In this article, we will take a closer look at the historical aspects of the dollar’s dominance, the reasons for de-dollarization, the possible BRICS plan for a common currency, and its effects on the US economy.

1. Bretton Woods Agreement (1944):

After World War II, the US dollar was made the global reserve currency by linking it to gold. Under this system, the currencies of other countries were linked to the dollar, and the dollar itself was convertible to gold.

2. Petrodollar System (1970s):

In the 1970s, the US entered into an agreement with Saudi Arabia, under which oil began to be sold only in dollars. This further strengthened the demand for the dollar and its global dominance.

3. Collapse of the Soviet Union (1991):

After the end of the Cold War, the US emerged as the sole superpower, and the dollar further strengthened its hold in the global financial system.

• Trust and Stability: The stability of the US economy and its legal system made the dollar a “safe haven”.

• Oil trade: Even today more than 80% of oil transactions are done in dollars.

• Global trade: Doing international trade in dollars reduces transaction costs.

• SWIFT system: The US has made the dollar mandatory through the SWIFT system of financial transactions.

1. Fear of US sanctions

– US sanctions on countries like Russia, Iran and Venezuela forced them to exit the dollar-based system. For example, Russia started gas trade in “rubles” after the Ukraine war in 2022.

2. Steps towards a multipolar world

– Countries like China and Russia are challenging the unipolar dominance of the US. China has promoted the Yuan under the “Belt and Road Initiative” (BRI).

3. Role of BRICS countries

– BRICS countries (Brazil, Russia, India, China, South Africa) are trying to become independent from the dollar through alternative financial institutions such as New Development Bank (NDB) and Contingent Reserve Arrangement (CRA).

4. Crypto currencies and digital currencies

– China has launched the digital Yuan (e-CNY), while Russia is considering legalizing crypto currencies.

At the BRICS summit in 2023, member countries began discussing the creation of a “Common Currency”. This proposal is considered to be the first major step to challenge the dollar.

Key points:

1. Goal: To free trade and investment between member countries from the dollar.

2. Challenges:

– Disparity in member countries’ economies (eg size of China vs. South Africa).

– Lack of common policies to keep the currency’s value stable. 3. India’s position: India is cautious about this proposal, as it is concerned about the Yuan’s dominance as an alternative to the dollar.

In 2024, BRICS has included new members like Saudi Arabia, Iran, Ethiopia and the United Arab Emirates. This expansion will increase the global influence of the organization, and may accelerate the pace of de-dollarization.

1. Economic challenges:

– Due to the decrease in demand for the dollar, America will have difficulty in getting cheap loans.

– Interest rates of US Treasury bonds may increase.

2. Political reputation:

– The weakening of the dollar will raise questions on American global leadership.

3. Risk of inflation: – The fall in the value of the dollar will make imports expensive, which can increase inflation in the US.

Future prospects

1. Slow progress: De-dollarization will not happen overnight. A currency will need the same trust and infrastructure to replace the dollar.

2. Rise of Yuan: China’s Yuan can compete with the dollar through the Central Bank International Payment System (CIPS).

3. Rise of digital currencies: Central bank digital currencies (CBDCs) can replace the dollar in the future.

The dominance of the dollar is still strong, but the efforts of BRICS and other countries have laid the foundation for a multipolar financial system. If the BRICS common currency succeeds, it will be a historic challenge to the dollar. However, for this, member countries will have to show economic solidarity by resolving mutual disputes. For countries like India, this is also an opportunity—they can determine their role in the new financial system. Ultimately, the process of de-dollarization is slow but continuous, and its outcome could redefine the global balance of power.