For decades, the United States dollar (USD) has been known as the king of currencies. But the dominance of the dollar is now seriously threatened. Over the past week, nations like China, Russia, Brazil, and Saudi Arabia have announced that they will be ditching the US dollar and continuing trade in their local currencies.
After the Second World War, the US dollar became the world’s reserve currency in 1944. Forty-four allied countries created a system to avoid another financial turmoil. This system contained a set of rules that shaped the global economy as we know it today. This system led to the creation of financial institutions like the World Bank and the International Monetary Fund (IMF).
The allied nations also agreed to a new exchange rate system that helps keep the price of investments, exchange rates, and commodities stable by having each country peg the value of its currency to the US dollar.
You might think, “Why is there a global rebellion against the dollar?”
Currencies are known to drive commerce, and the dollar’s significance gives the United States an influence on the global economy. If countries move away from the dollar, it will mostly hurt America. The value of the US dollar has been gradually declining since the pandemic, causing other currencies to rise above it.
Many countries have raised concerns about US trade policy and how much power it has on the economy, which might be one of the reasons they are ditching it and seeking an alternative.
Tech billionaire Elon Musk tweeted concerning this, stating that US policy has been heavy-handed, making countries want to dump the dollar.
China and Brazil made a record trade worth 150 billion dollars last year. They have agreed to trade in their currencies and ditch the US dollar. This will enable the two countries to trade directly without converting their local currencies to dollars. For the foreseeable future, the dollar will not gain from these trades.
China is also trying to internationalize the yuan by building a large group of partner nations. These countries will use the yuan as the primary trade currency instead of the US dollar. China is progressing in that part as it has secured bilateral currency swap agreements with over 40 countries, so the yuan is gaining international acceptance.
The world economy is highly connected to the dollar, but now it wants to cut ties. Can the Chinese yuan dethrone the US dollar as the world’s reserve currency?
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Photo by Barta4
