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Dollar-based System with no real “Alternative”
Context
The stability and dominance of the United States dollar (USD) in the global economy have been subjects of much debate and speculation since the Bretton Woods Conference in 1944. Despite numerous events (Nixon Shock, the rise of the euro, and China's economic ascent) and predictions of its downfall over the years, the USD continues to reign as the world's primary reserve currency.
What factors contribute to USD’s continued dominance?
- Strong economy: The U.S. economy's size, depth of capital markets, and trusted financial institutions contribute to the USD's continued dominance.
- Holding significant portion: Unlike previous reserve currencies, the USD occupies a unique position in international commerce, accounting for a significant portion of foreign reserve holdings and facilitating the majority of foreign exchange transactions worldwide.
- Trusted asset: Its stability and liquidity make it a trusted asset for countries and consumers globally.
- No significant alternative: While emerging technologies and multilateral financial arrangements may test the USD's supremacy, significant alternatives have yet to emerge.
Challenges to Dollar Dominance:
- Despite its resilience, the USD faces challenges from rival currencies and geopolitical tensions.
- Efforts to de-dollarize trade and investment, coupled with technological advancements, pose incremental threats to the USD's hegemony.
- While rivals and partners alike seek to challenge the USD's hegemony, significant barriers, including trust, liquidity, and infrastructure, limit the emergence of viable alternatives. However, evolving geopolitical dynamics and technological innovations may gradually erode the USD's dominance over time.
India's Pursuit of De-dollarisation: Economic Implications
- India, as a BRICS member, is challenging traditional financial systems through de-dollarisation efforts.
- Shift in Trade Dynamics: Increased trade in local currencies, like the Indian Rupee, grants India more control over monetary policy and shields it from external shocks.
- Monetary Policy Autonomy: Reduced reliance on the U.S. dollar empowers India to set independent monetary policies, enhancing economic stability.
- Enhanced Trade Relations: Trade in local currencies fosters stronger economic ties, streamlines transactions, and reduces costs.
- Strengthened Indian Rupee: De-dollarisation can lead to a stronger rupee, boosting purchasing power and reducing inflationary pressures.
- Economic Independence: By diversifying away from the dollar, India reduces vulnerability to U.S.-led sanctions, enhancing economic independence.
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