Dollar-free trade is an idea whose time hasn't yet come

The world is stuck with the US dollar's dominance as there's no other currency that can take its role

- MADAN SABNAVIS

The return to the US White House of Donald Trump has already generated market volatility, given his rather idiosyncratic stance on tariffs. A threat has also been made that the US will increase tariffs on the Brics group of countries if they dealt in any currency other than the dollar. But can countries really work without the dollar? In this context, we should analyse how global payments are transacted by countries.

Global talk of de-dollarization intensified after the US put an embargo on all of Russia's dollar assets in 2022. There is, hence, a palpable worry that any country on the wrong side of the US would risk such an embargo, besides punitive tariffs. The larger concern is that Washington may freeze the dollar assets of a country it chooses to punish. As most countries hold a significant part of their forex reserves in US government debt, this is no small fear. The forex assets of Russia being impounded could be treated as a sovereign default by the US. This explains why de-dollarization is back in discussion.

Presently, based on International Monetary Fund (IMF) data, 59% of global forex reserves are held in US dollars, followed by almost 20% in euros. The yen and pound account for 5.5% and 4.9%, respectively, while the balance is spread across the renminbi and Canadian and Australian dollars, each with shares of 2-3%. In the early 2000s, right after the euro came into existence, the ratios were more skewed towards the US dollar—it had a 71% share and the euro 18%. The euro ascended till 2009, peaking at 28% before declining post the euro crisis.