De-dollarisation

De-dollarisation is the process of reducing reliance on the US dollar in international trade, finance and official reserves. It may involve greater use of national currencies, alternative reserve assets or non-dollar payment arrangements. It does not necessarily mean eliminating the dollar or replacing it with one common currency.

Where de-dollarisation occurs

The dollar performs several distinct international functions, so de-dollarisation can advance unevenly across them.

• Central banks may diversify foreign-exchange reserves towards other currencies or gold.
• Countries and firms may invoice and settle cross-border trade in local or third-country currencies.
• Borrowers and lenders may reduce dollar-denominated financing, while payment systems may lessen dependence on dollar clearing.
• Bilateral local-currency arrangements and regional financial mechanisms can facilitate such diversification.

Why countries pursue it

The principal objective is greater monetary and strategic autonomy, rather than merely changing the currency used in trade.

• It can reduce exposure to dollar exchange-rate movements and spillovers from United States monetary policy.
• It may lower currency-conversion costs when trading partners can directly use their own currencies.
• It can reduce vulnerability to disruption of dollar-based financial and payment channels.
• Reserve diversification can spread risk across currencies and assets.

Limits and implications

Dollar use is sustained by network effects, widespread trade invoicing, deep and liquid United States financial markets, and the availability of dollar funding. Therefore, de-dollarisation is generally gradual and depends on confidence, convertibility, financial-market depth and macroeconomic stability.

• Local-currency settlement works best when partners can use or invest the balances they accumulate.
• Fragmented currency and payment arrangements may increase transaction costs, liquidity risks and exchange-rate risks.
• For India, wider rupee settlement can support trade and reduce conversion dependence; the RBI's 2022 framework permits international trade settlement in rupees through Special Rupee Vostro Accounts.