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The United States (US) dollar is the world’s number one international trade and reserve currency. This means that the vast majority of payment transactions globally take place in the US dollar and that countries and investors across the world use the dollars as a store of value.
Currently, the dollar accounts for about 60% of global reserves and is followed by the Euro at about 20%. The Chinese Yuan accounts for less than 3% of global reserves.
This dollar’s dominance has given the United States of America (USA) 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 trade with other countries complicated (a good example is Zimbabwe).
Read more: On the impact of increasing the statutory reserve requirement by Bright Chizonde
Further, US Federal Reserve Bank monetary policy decisions have the extended power to influence the global economy and not only the US Economy. When the Fed reduces money supply in order to control USA local inflation, this leads to the appreciation of the US dollar and depreciation of all other currencies.
Following the Russia-Ukraine war, the USA placed sanctions on Russia and thus making trade and investment difficult. Consequently, Russia and China have escalated their push for De-Dollarization (implying reducing the global dominance of the US Dollar).
China and the other BRICS states (Brazil, Russia, India and South Africa) are natural allies to Russia due to trade partnerships and economic power. Therefore, the US sanctions have only worked to make this alliance stronger.
Considering that the BRICS account for about 25% of global GDP and that China’s trade with Africa is more than 4 times as compared to US trade with Africa, there is indeed a serious threat on the US dollars global dominance. Other African countries are therefore likely to align with the BRICS due to trade values.
As of February 2023, the US dollar lost its dominance within the Russian Economy and bilateral agreements to trade without using the US dollar have been set up among the BRICS and their close trading partners.
However, it is important to note that dethroning the US dollar is not going to be an easy undertaking. Most Financial experts believe that countries across the world will continue to hold on to US dollar reserves and continue to trade in US dollars for at least the next two decades!
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