By Dr Au Yomg Hui Nee

Backdrop

Based on history, there have been two eras of dollar hegemony which were represented by different models. The first model corresponded with the Bretton Woods era. The priority of the US Dollar in a world monetary system originated from the Bretton Woods conference held in 1944, i.e., the United Nations Monetary and Financial Conference.  The US started dominating the world economy progressively  beginning the World War, weaponising the US  Dollar and the gold reserve.  

In 1971, the then U.S. President Nixon halted the convertibility of dollars to gold to curb inflation. Thereafter, US energy dominance changed a fundamental economic relationship between oil and the dollar, in 1974. An “Oil for Dollars” agreement with Saudi Arabia and the rest of the Middle East or OPEC countries, reinforced the global oil trade in a single currency, the US Dollar. This petrodollar system, or an “oil for dollars” system, caused an artificial demand for U.S. dollars around the world. It is referred as Neoliberal era as an expression of the return to hegemony of the financial fraction of ruling classes. 

De-dollarisation and Plausible Benefits

The use of alternate currencies is a move towards diversification and risk reduction. The US dollar and the euro are still the strongest forms of exchangeable and reserve currencies. Trade in local currencies gives alternatives to emerging economies, especially if they are able to import items (e.g., goods, food and oil) in their national currencies. The major reasons for de-dollarisation are the threat of the US dollar hegemony and the urge to establish a new international financial order. 

Russia, for one, has taken the radical steps in de-dollarisation. Russia not only carries out de-dollarisation in the country as well as promotes international currency payments for energy. The China Government is also promoting bilateral swap agreement and Renminbi settlement with its trading partners. Although de-dollarisation cannot totally eliminate the influence of the US dollar on the economies of China and Russia, it could [potentially result in easing the stranglehold of the dollar-dominance.

Conditions for De-dollarisation

De-dollarisation represents economic measures seeking to, among others, enhance the financial attractiveness of a local currency. Currencies from countries such as China and Russia trail the United States in distributive efficiency of market resources. This would,  by extension, impact financial stability, the capital market, the scale of the economy, infrastructure, and financial products. These frailties are influencing the de-dollarisation agenda.

A country may transition from a foreign monetary unit to the local currency which is being pursued by China and Russia and the wider BRICS  initiative.  However, this will uppermost require strategic changes in China and Russian economies. The trading countries of China and Russian will seek openness and transparency of financial markets related to the freedom of capital movement of these national currencies.

Therefore, a currency is not going to be able to swiftly take over the role of the US dollar as an international currency. The collective pursuit of de-dollarisation by many countries shall encounter impediments as participating nations do not necessarily share the same interests. At the same time, there are other options in the international payment system. 

Relevancy of gold and digital currency 

Gold and digital currency are becoming essential measures in de-dollarisation. Gold is considered an essential component of de-dollarisation, for most countries. Countries such as China and Russia have amassed considerable gold reserves as an initiative for the future. According to the World Gold Council, the top gold reserves countries by sequence are the USA, Germany, Italy, France, Russia and China. Russia and China have gold reserves at 2,326.5t and 2,068.3t respectively by May 2023.

We should also be tracking the digital currency for it will set the trend for future development. Central Banks Digital Currency (CBDC) may lead to de-dollarization. The CBDC could reduce the potential reach of U.S. sanctions and Washington’s financial power. There are two kinds of central bank digital currencies. The first type is in the wholesale realm. The second type is in the retail space. CBDCs have to be designed to preserve the two-tiered financial system, not merely about models where the central bank provides retail services directly.

In the case of Russia, the Russian Law on Digital Financial Assets came into effect in 2021 on the digital Ruble. The Chinese CBDC Prohibition Act adds a prohibition on Money Service Businesses from engaging in any transaction that involves a central bank digital currency issued by the People’s Republic of China (PRC). The digital yuan (e-CNY) incorporates blockchain technology that every transaction is recorded and traceable in a digital ledger. Pilot city Changshu has been paying the transit subsidies in digital yuan since October 2022.

Indeed the next few years shall witness intensifying geopolitical conflicts, extending from trade wars to de-dollarisation.

Profile of Associate Professor Dr. Au Yong Hui Nee

Associate Professor Dr. Au Yong Hui Nee holds a PhD degree in Technology Management from USM, a graduate of MA Economics from University of Tsukuba in Japan and Bachelor of Science (Honours) Resource Economics from UPM. She is the Dean of the Faculty of Business and Finance, Universiti Tunku Abdul Rahman (UTAR). She was selected and sponsored to attend Impact Evaluation Methods by World Bank and an excellent participant award from Biogas Institute, Ministry of Agriculture and Rural Affairs, China. She is a Member of the Chartered Institute of Logistics and Transport (CILT). Dr. Au Yong has published over thirty articles in indexed journals and more than eighty papers in peer-reviewed journals and conference proceedings. She serves as a chief editor of China’s Belt and Road Initiative book published by World Scientific Publishing (Singapore), editor of Trends Journal of Sciences Research (USA), reviewer editor of Frontiers in Environmental Economics (Switzerland) and reviewer for more than twenty international indexed journals. Dr. Au Yong was trained in commercial and investment banks. Prior to joining academia, she held managerial positions at Fortune 500 multinational corporations and a state agency. She has completed research and consulting projects for local and international clients (Japan, Pakistan and United Kingdom). She is a recipient of Japanese Government Monbukagakusho (MEXT) Scholarship, Public Services Department Scholarship, Ministry of Higher Education MyPhD Scholarship, Malaysian Institute of Management Tun Razak Youth Leadership Award, best oral presentation award and best paper awards.

Research Areas: Digital Economy, Environmental, Social & Governance (ESG), International Economics, Logistics and Supply Chain.

URL: http://www.utar.edu.my/cv/index.jsp?cv=auyonghn