The De-Dollarization Wave

As established in the previous section, the USD's rise to prominence came as a direct result of post-WWII geopolitical and economic realities. However, the global landscape has since shifted dramatically.

Most notably: the liberation and industrialization of former colonies, the rise of China, the establishment of BRICS, the increasing regional economic and political integration in the Global South, and the growing distrust and resentment towards American and Western institutions.

While the dollar continues to dominate, largely due to momentum, growing imbalances can no longer be sustained. The U.S.-led financial order no longer accurately reflects the world’s evolving economic and geopolitical realities.

As the world transitions towards a multipolar order economically and geopolitically, a corresponding rebalancing of the global financial order is not just expected but inevitable. This section examines the de-dollarization movement and highlights recent developments that showcase its growing momentum.

To begin, de-dollarization has been a periodically recurrent theme since the dollar became the global reserve currency. However, it has only gained momentum over the past two decades. Cross-country analysis by scholar Abdelati highlights three key approaches to de-dollarization: macroeconomic policies, financial sector reforms, and trade agreements.

Macroeconomic policies

To reduce dependence on the USD, a country must build enough confidence in its local currency. Fiscally responsible macroeconomic policies aimed at curbing inflation, reducing debt and maintaining balanced budgets, and cultivating diversified reserves away from the USD by increasing holdings in gold and other currencies are a few strategies a country can adopt to boost the use of its currency nationally and internationally and reduce dependence on the USD.

Financial sector reforms

Regulatory and institutional changes targeting a country’s financial sector can help it sustainably move away from the USD. Policies such as differential reserve requirement (requiring banks to hold higher reserve for USD deposits), local currency contracting (mandating that domestic contracts be conducted in the national currency), and capital controls on dollar holdings by residents and businesses, are few examples that would encourage de-dollarization locally.

International trade and transaction settlements

International trade and cross-border transaction settlement are mostly conducted through the dollar. Data show that 54% of total export invoicing (and typically settlement) is done in USD. Additionally, due to its ubiquitousness and high liquidity, the USD is usually used when exchanging one currency to another, making it difficult to bypass. To de-dollarize international trade, whether for side-stepping American sanctions or internationalizing local currencies, bilateral and multilateral trade agreements can require that trade is settled in local currencies.

Sustainable de-dollarization

A combination of all three strategies is required for a country to safely and sustainably de-dollarize. Since 1999, there has been a documented decline in the dollar's share of international reserves, adjusted for exchange rates, averaging 0.6% per year.

In 2024, the IMF Currency Composition of Official Foreign Exchange Reserves (COFER) report indicated that the UDS share of global reserves fell to 57.4%—a dramatic fall from 72% in 1999.

Strikingly, this decline has not been matched by a proportional rise in other traditional reserve currencies, such as the euro, yen, or pound sterling. Instead, there has been a documented shift of money flow into two destinations: a quarter into the Chinese renminbi and three quarters into a handful of small local currencies.

Additionally, the two largest holders of U.S. treasury bonds, Japan and China, have been reducing their holdings since 2021 and 2013 respectively with China cutting its reserve holding by 41.6% since 2015. Over the same period, gold reserves in China, Russia, India, and Brazil saw a significant increase.

Drivers of De-Dollarization

To understand this new wave of de-dollarization, it is essential to examine its underlying drivers.

The weaponization of the USD

The first key driver of de-dollarization is the desire to reduce the vulnerabilities associated with dependence on the USD, especially as it becomes increasingly weaponized.

Since the 1960s, the United States has leveraged its dominance in the global financial system to impose unilateral economic sanctions on countries that do not align with its foreign policy objectives.

Today, more than one-third of the global population, 60% of all low-income countries, and over one-quarter of global GDP are subject to American sanctions, often imposed unilaterally and in violation of international law against collective punishment.

These sanctions not only limit access to the American financial system but also isolate targeted countries from essential trade networks, banking services, and international payment systems. This form of financial isolation severely hampers a sanctioned state's ability to engage in cross-border transactions, settle trade in international currencies, and sustain stable relationships with global banks and businesses critical to its supply chains.

As a result, the USD is no longer perceived like other currencies, as a neutral store of value and medium of exchange. Instead, it is increasingly viewed as a geopolitical weapon, capable of exerting significant influence over the economic sovereignty of other nations.

Weakened monetary sovereginty

Second, as the global reserve currency, the USD has granted the United States significant economic power that exposes other countries to the risks associated with its monetary policies. Yeyati et al. (2019, p.18) empirically prove the weakened monetary sovereignty of a dollarized nation and highlight its susceptibility to the “fear of floating.” Extensive use of the USD limits a nation's control over its monetary policy, constraining its central bank’s ability to adjust interest rates and respond to domestic economic conditions.

Hegemony by default

Finally, the dollar is the global reserve currency by default. It reigns supreme because there is simply no alternative. However, this narrative is slowly changing. With the rise of the euro, the Chinese renminbi, and a handful of local currencies in international trade, the dollar is no longer the only viable option to park a country’s excess money or facilitate cross-border transactions.

It is in direct response to the outsized influence the U.S. wields over the international financial system, coalitions of emerging economies, such as the BRICS, have intensified efforts to reduce their dependence on the USD and establish alternative financial infrastructures.

The following chapter explores recent developments within the BRICS alliance and the growing momentum behind its push for de-dollarization.