De-dollarisation: Trends, Drivers & Challenges
- Recent trends show a steady diversification of reserves, indicating a gradual de-dollarisation, even though U.S. Treasuries are considered the safest forex asset.
What is De-dollarisation?
- De-dollarisation refers to reducing reliance on the U.S. dollar as the primary reserve currency, medium of exchange, or unit of account. This involves countries diversifying their foreign reserves and conducting international trade in alternative currencies.
Trends Towards De-dollarisation
- Debt Shift: Foreign U.S. Treasury holdings decreased from 34% (2015) to 24.9% (2025), with domestic investors filling the gap.
- Eroding Dollar Share: Dollar’s global reserve share fell from 65.5% (2016) to 57.7% (2025).
- Rising Alternatives: Euro, pound, yen, and renminbi gained reserve space, signalling diversification.
- Gold Surge: Central banks increased gold shares: India from 5.9% to 13.1%, China from 1.7% to 6.7%.
Key Drivers Pushing De-dollarisation
- Sanctions Risk: Financial sanctions and SWIFT exclusions raised sovereign concerns over dollar reliance.
- Fiscal Strains: Repeated U.S. debt-ceiling standoffs undermined Treasuries’ absolute safe-haven image.
- Trade Shifts: Tariff disputes and U.S. interventions pushed diversification away from dollar assets.
- Gold Demand: The pandemic and wars have boosted central banks’ preference for gold reserves.
- Alternatives: Regional blocs and payment networks like BRICS Pay emerged as substitutes to SWIFT.
Global Efforts Towards De-dollarisation
| Country | Key Initiatives | Details |
| India | Local Currency Trade Agreements | Signed agreements with Russia and UAE to conduct trade in rupees, reducing reliance on the U.S. dollar. |
|
Vostro Accounts |
Opened special Vostro accounts to facilitate trade in local currencies. | |
| Russia |
SPFS (System for Transfer of Financial Messages) |
Developed SPFS as an alternative to SWIFT, enabling transactions without the U.S. dollar. |
| Gold Reserves | Increasing gold reserves to diversify away from the U.S. dollar. | |
| China | CIPS (Cross-Border Interbank Payment System) | Established CIPS to facilitate yuan transactions globally. |
| Currency Swap Agreements | Entered into agreements with several countries to promote the yuan in international trade. | |
| South Africa | Regional Currency Use | Encouraged the use of the South African rand in regional trade within Africa. |
Challenges Associated with De-dollarisation
- Transition Costs: Switching from the U.S. dollar to other currencies involves significant expenses, including updating financial systems and renegotiating trade agreements.
- Market Volatility: Introducing new currencies can cause market instability and uncertainty, potentially disrupting global trade and investment.
- Limited global trust in alternatives: Currency stability, capital controls, political risk reduce the attractiveness of other currencies (like the yuan) as replacements.
- Geopolitical Tensions: Efforts to reduce reliance on the U.S. dollar may lead to geopolitical tensions and conflicts, which can be perceived as a challenge to U.S. economic dominance.
- Institutional Inertia: Financial institutions and businesses are accustomed to using the U.S. dollar, and changing established practices requires considerable effort and willingness to adapt.
Why De-dollarisation Remains Unrealistic?
- Currently, approximately 47% of all payments processed through the SWIFT system are settled in US dollars.
- Although the dollar’s share of international reserves has fallen (from ~70 % in 2000 to ~59 %), this decline is partially “illusory” because other forms of dollar exposure (like bank deposits, foreign assets, etc.) have expanded.
“While diversification trends are visible, the dollar’s entrenched role in payments, reserves, and global finance ensures its dominance in the near term. De-dollarisation is thus more of a gradual adjustment than a sudden shift.”
Also read > Internationalisation of Rupee.
