De-dollarisation picking up in the Brics bloc but...

The United States dollar is the number one international trade and reserve currency. That means the vast majority of payment transactions take place in the currency and countries and investors across the world use the greenback as a store of value.

The dollar accounts for about 60 per cent of global reserves, the euro 20 per cent and the Chinese yuan accounts for less than three per cent. 

This dominance has given America significant power in the global economy. For example, US sanctions are powerful because they essentially cut off a country from transacting using the dollar, making the trade with other countries complicated (a good example is Zimbabwe). 

Further, US Federal Reserve Bank monetary policy decisions have the extended power to influence not only the US but also the global economy. When the Fed reduces the money supply to control US’s local inflation, that leads to the appreciation of the dollar and depreciation of all other currencies. 

Trade partnerships

Following the Russian-Ukrainian war, the US placed sanctions on Russia. Consequently, Russia and China have escalated their push for de-dollarisation (reducing the global dominance of the dollar). China and the other states in the Brics (Brazil, Russia, India, China and South Africa)—a bloc of the largest developing economies—are natural allies of Russia due to trade partnerships and economic power. 

With the Brics accounting for about 25 per cent of global GDP and China’s trade with Africa more than four times of the US, there is a serious threat on the dollar. Other African countries are likely to align with the Brics due to trade values. 

As of February, the dollar had lost its dominance within the Russian economy and the rest of the Brics and their close trading partners. 

But dethroning the dollar won’t be easy. Financial experts believe countries across the world will continue to hold on to dollar reserves and trade in dollars for at least the next two decades! 

Mr Maranga is a supply chain management PhD student at JKUAT. [email protected].