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DE-DOLLARISATION and GLOBAL FINANCE



  Jun 15, 2024

DE-DOLLARISATION and GLOBAL FINANCE



Overview

The concept of de-dollarisation refers to the global movement away from reliance on the U.S. dollar as the world’s primary reserve currency. Recent events, including the conviction of former President Donald Trump and the potential seizure of Russian assets, have sparked discussions about the strength of U.S. rule of law and the sustainability of the dollar’s dominance.

Challenges to the Dollar’s Dominance

1. Rule of Law Concerns: The conviction of Donald Trump and potential seizure of Russian assets have led to questions about the U.S. legal system’s reliability. Some see these actions as undermining the pillars that support the dollar’s status as the world’s reserve currency.

2. Sanctions and Debt: The U.S. has significantly increased its use of sanctions as a foreign policy tool, coupled with a growing national debt. This has caused concerns among global investors about the sustainability of the dollar’s dominance.

3. Global Reaction: Financial services executives and global investors express growing concern over U.S. policies. Despite efforts, no credible alternative to the dollar has emerged, and geopolitical tensions further complicate the situation.

Current State and Future Prospects

• Central Bank Reserves: Despite the concerns, central banks plan to increase their dollar holdings over the next 12-24 months, driven by global geopolitical tensions and a need for liquidity.

• Dollar’s Core Strengths: The dollar’s dominant role is supported by the U.S.’s democratic principles, economic size, market depth, and institutional strength. Despite current challenges, these fundamentals continue to underpin its global appeal.

• Investor Sentiment: Investors, both in the U.S. and abroad, recognize the messiness of the U.S. democratic system but remain confident in its overall stability and strength compared to other options.

Key Points of Concern

• Federal Reserve Authority: Any potential threats to the Federal Reserve’s authority could significantly impact the dollar’s credibility.

• Sanctions and Safe Haven Status: The extensive use of sanctions and discussions about seizing sovereign assets, such as the $300 billion of Russian assets, have raised questions about the U.S.’s status as a financial safe haven.

• Legal System Independence: Cases like ByteDance’s challenge to the U.S. ban on TikTok are closely watched as indicators of the independence and reliability of the U.S. legal system.

Conclusion

While the U.S. faces growing scrutiny over its legal and financial policies, the dollar continues to hold a dominant position due to the underlying strengths of the American economic and political systems. The global search for alternatives to the dollar remains slow, hindered by geopolitical uncertainties and the lack of more attractive options.



SRIRAM’s



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