Nayanshi Jain
Introduction
When Russia was cut off from significant parts of the global financial system in 2022, the world was reminded of the immense power embedded in the United States dollar. At the same time, countries across the Global South began accelerating efforts to reduce their dependence on the currency. BRICS nations intensified discussions on local currency trade, India settled portions of its trade with Russia in rupees, and China expanded yuan-based transactions across Asia, Africa, and Latin America. Together, these developments revived a question that has long occupied economists and policymakers: Is the era of dollar dominance beginning to fade?
These developments have fueled growing speculation about the future of the international monetary order, with scholars and policymakers divided over whether they represent the early stages of a structural transformation or merely incremental adjustments within an enduring dollar-centric system.
One view suggests that the world is entering a new era in which the dollar’s supremacy will gradually erode, leading to de-dollarisation and paving the way for a more multipolar currency system. Another argues that despite growing efforts at diversification, no currency currently possesses the institutional strength, liquidity, and global trust required to rival the dollar.
The central question therefore remains: Is de-dollarisation a transformative challenge to dollar hegemony, or is it an overstated phenomenon driven by geopolitical circumstances?
Background
The concept of de-dollarisation cannot be understood without first examining how the United States dollar came to dominate the global economy. Following the Second World War, the Bretton Woods Agreement (1944) established the dollar as the anchor of the international monetary system. Over time, the currency became the preferred medium for global trade, investment, commodity pricing, and reserve accumulation.
As a result, countries around the world developed significant economic dependence on the dollar. A major pillar of this dominance is the petrodollar system, which emerged in the 1970s when major oil-exporting countries agreed to price and trade crude oil primarily in US dollars. Since oil is one of the world’s most traded commodities, countries across the globe have been required to hold dollar reserves to meet their energy needs. This arrangement significantly increased global demand for the dollar and reinforced its position at the centre of the international monetary system. Gradually, the dollar became not only the preferred currency for energy trade but also for a wide range of commodities, international investments, and financial transactions.
Although this system facilitated global economic integration, it also allowed countries to take cognizance of rising fluctuations in US monetary policies and geopolitical tensions affecting the world’s economic order.
De-dollarisation emerged as a response to these concerns. It’s the process of reducing dependence on the United States dollar in international economic and financial transactions. It helps countries to decrease the use of the dollar in trade settlements, foreign exchange reserves, cross-border payments, international borrowing, and commodity pricing.
Against this backdrop, de-dollarisation seeks to reduce these dependencies through various mechanisms. Countries may choose to settle bilateral trade in local currencies rather than dollars, diversify their foreign exchange reserves by increasing holdings of currencies such as the euro or Chinese yuan, establish alternative payment systems, or promote regional financial cooperation.
Functioning of De-dollarisation
The recent movement of de-dollarisation is driven by a combination of geopolitical developments, economic considerations, and technological innovations.
1. Geopolitical Factors: The imposition of the financial sanctions against Russia following the February 2022 Ukraine invasion demonstrated the strategic influence associated with dollar dominance. Restrictions on access to the SWIFT payment system, freezing of over $300 billion in Central Bank foreign reserves, and placing targeted embargoes on Russian energy, trade, and technology, highlighted how financial infrastructure can be used as a geopolitical tool.
2. Rise of BRICS: The growing economic influence of BRICS has further strengthened discussions surrounding de-dollarisation. Rather than seeking to replace the dollar outright, BRICS members have focused on expanding the use of local currencies in trade and investment. Bilateral currency agreements, cross-border settlement mechanisms, and initiatives such as BRICS Pay reflect attempts to lower transaction costs and reduce exposure to exchange-rate risks associated with dollar-denominated trade. These developments signal a broader trend towards greater financially multipolar world.
3. Reserve Diversification: Another important driver is the changing composition of global foreign exchange reserves. Central banks increasingly view reserve diversification as a prudent risk-management strategy in an uncertain geopolitical environment. In addition to maintaining dollar assets, many monetary authorities have expanded holdings of gold, euros, Chinese yuan, and other reserve instruments. This shift does not indicate a rejection of the dollar; rather, it reflects an effort to improve resilience by reducing concentration risk within reserve portfolios.
4. Financial Technology: Rapid advances in financial technology have also created new possibilities for cross-border transactions. Central Bank Digital Currencies (CBDCs), tokenised assets, and alternative payment infrastructures are gradually challenging the traditional architecture of international finance. Projects supported by the Bank for International Settlements, including experiments in multi-CBDC settlements, demonstrate how technological innovation could reduce transaction costs and facilitate cross-border payments without exclusive reliance on existing dollar-based systems. Although these developments remain at an early stage, they have the potential to contribute to a more diversified global monetary ecosystem.
Performance: Separating Myth from Reality
Myth 1: The Dollar Is Rapidly Losing Its Global Status
Predictions regarding the decline of the US dollar have intensified following sanctions on Russia and the expansion of BRICS. Yet empirical evidence presents a more nuanced picture. According to International Institute for Strategic Studies (IISS) the US dollar remains the backbone of global finance, accounting for 56% of global foreign exchange reserves and involved in 89% of global foreign exchange market trades. Such figures highlights the persistent centrality of the dollar in global finance.
Myth 2: BRICS Will Soon Replace the Dollar
The growing prominence of BRICS has fueled speculation that the bloc could challenge the dollar through a common currency or alternative payment system.
In reality, the member states differ significantly in terms of economic size, inflation rates, political systems, and strategic priorities. Unlike the European Union, BRICS lacks the institutional integration necessary to support a common currency. Furthermore, none of the member currencies currently possess the liquidity, convertibility, and global acceptance required to rival the dollar.
Even China, whose currency is often viewed as a potential challenger, accounts for only a modest share of global reserves and international payments.
Myth 3: Emerging Economies Can Achieve Monetary Sovereignty by Abandoning the Dollar
For many emerging economies, dependence on the dollar is not merely a policy choice but a structural feature of global finance. International borrowing, commodity trade, and reserve accumulation continue to rely heavily on dollar-denominated instruments. A rapid transition away from the dollar could expose economies to liquidity shortages, exchange-rate volatility, and higher transaction costs. Many developing economies continue to borrow in dollars because international investors are unwilling to take the risks associated with less stable local currencies.
Impact on Emerging Economies
For emerging economies, de-dollarisation presents a complex trade-off between autonomy and integration. While reducing dependence on the US dollar offers opportunities to enhance resilience and policy independence, it simultaneously exposes structural weaknesses within domestic financial systems. The potential gains from reducing dependence on the dollar must therefore be weighed against the practical realities of operating within a highly interconnected global financial system.
Opportunities
1. Enhancing Monetary Sovereignty
One of the most compelling arguments in favour of de-dollarisation is the prospect of greater monetary sovereignty. Research by the IMF and BIS demonstrates that changes in US interest rates often influence capital flows, borrowing costs, and financial conditions across emerging markets. For instance, the aggressive interest-rate hikes undertaken by the US Federal Reserve in 2022 triggered capital outflows from several emerging economies and exerted downward pressure on their currencies. By expanding the use of local currencies in trade and finance, governments may reduce their vulnerability to such spillover effects and gain greater control over domestic macroeconomic management.
2. Reducing Exchange-Rate Vulnerabilities
The widespread use of the dollar in international transactions exposes many developing countries to exchange-rate risks. When local currencies depreciate against the dollar, the cost of imports and servicing external debt increases substantially. Sri Lanka’s debt crisis and Pakistan’s balance-of-payments difficulties highlighted how dollar shortages can intensify economic instability. Local-currency settlements can reduce the need for dollar reserves and minimise the impact of abrupt currency fluctuations on trade and investment flows.
3. Improving Economic Efficiency
Direct settlements in national currencies can lower conversion costs and reduce dependence on intermediary financial institutions. A notable example is the expansion of local-currency trade arrangements between India and Russia following Western sanctions on Moscow. By facilitating transactions in rupees and roubles, both countries sought to reduce transaction costs and ensure continuity in trade, particularly in the energy sector. Similar initiatives are being explored within ASEAN and BRICS frameworks to promote regional economic integration.
4. Enhancing Strategic Resilience
The increasing use of sanctions and financial restrictions has encouraged several countries to explore alternatives to dollar-centred payment networks. Diversified payment infrastructures may strengthen resilience against geopolitical disruptions and enhance economic security. China provides a notable example of this trend. Concerned about its vulnerability to a financial system dominated by the United States, China has actively promoted the internationalisation of the yuan and developed the Cross-Border Interbank Payment System (CIPS), which facilitates international transactions in yuan. Similarly, Russia has expanded the use of its domestic financial messaging system (SPFS) following restrictions on access to SWIFT.
Constraints
1. Persistent Liquidity Advantages of the Dollar
The greatest obstacle to de-dollarisation remains the unmatched liquidity of dollar-denominated markets. The US Treasury market remains the largest and most liquid government bond market in the world, making dollar assets attractive during periods of uncertainty. This was evident during the COVID-19 pandemic, when investors across the globe sought safety in dollar-denominated assets despite the crisis originating in the United States itself.
2. Volatility and Confidence Deficits
Many emerging-market currencies continue to experience significant fluctuations due to inflationary pressures, capital-flow volatility, and political uncertainty. The Argentine Peso and Turkish lira provide prominent examples of currencies that have faced severe depreciation in recent years. Such instability discourages businesses and investors from using these currencies for international trade and reserve holdings.
3. Institutional and Financial Market Limitations
Currency internationalisation requires more than political commitment. It depends on strong financial institutions, credible monetary frameworks, legal certainty, and deep capital markets. While China has made significant progress in promoting the yuan internationally, capital controls and concerns regarding transparency continue to limit its ability to challenge the dollar’s global role. These challenges are even more pronounced for smaller emerging economies with less-developed financial systems.
4. Risks of Geoeconomic Fragmentation
A world characterised by competing payment systems, fragmented financial networks, and parallel reserve structures may undermine the efficiency of global economic integration. The IMF has warned that increasing geoeconomic fragmentation could reduce global output and increase transaction costs by limiting cross-border financial flows and reducing economic cooperation. While diversification can improve resilience, excessive fragmentation risks creating separate financial blocs that hinder the efficiency of international trade and investment.
Ultimately, de-dollarisation is neither an unqualified opportunity nor an inevitable threat. Its implications for emerging economies will depend on whether diversification efforts are accompanied by institutional strengthening, financial market development, and greater international cooperation.
India’s Position: A Pragmatic Middle Path
India’s engagement with the de-dollarisation debate is characterised by pragmatism rather than ideological opposition to the dollar. As one of the world’s fastest-growing major economies, India recognises both the advantages of a dollar-centred financial system and the vulnerabilities associated with excessive dependence on a single currency.
Rather than advocating the displacement of the US dollar, India seeks to expand the role of the rupee in international transactions while maintaining the benefits derived from participation in a dollar-centric global economy.
A key initiative in this regard has been the Reserve Bank of India’s (RBI) Local Currency Settlement mechanism introduced in 2022. Through Special Rupee Vostro Accounts (SRVAs), foreign banks can settle trade transactions in Indian rupees, reducing dependence on intermediary currencies and lowering transaction costs. By late 2024, more than 150 SRVAs had been opened by banks from dozens of countries, reflecting growing interest in rupee-based trade settlements.
India’s trade relationship with Russia provides a prominent example. Following Western sanctions on Russia, India expanded imports of discounted Russian crude oil and explored rupee-rouble settlement arrangements to facilitate trade despite disruptions in conventional payment channels. These arrangements highlighted the potential of local-currency trade in enhancing economic resilience.
Another pillar of India’s strategy is the internationalisation of digital payments through Unified Payments Interface (UPI). Partnerships with countries such as Singapore, the UAE, France, and others have enabled cross-border digital payments, supporting India’s broader objective of strengthening its financial connectivity.
At the same time, the RBI has pursued reserve diversification by maintaining a balanced portfolio of foreign exchange reserves, including increased gold holdings alongside traditional reserve assets. Such measures are intended to improve resilience rather than reduce exposure to the dollar entirely.
Most importantly, Indian policymakers have repeatedly emphasised that de-dollarisation is not an explicit national objective. Government officials have clarified that India is focused on promoting local-currency trade and improving payment efficiency rather than pursuing a systematic reduction in the role of the US dollar. This distinction is crucial.
New Delhi seeks greater monetary flexibility and international acceptance of the rupee while preserving the stability, liquidity, and efficiency provided by the existing global financial system.
The Way Forward
The future trajectory of de-dollarisation remains one of the most contested questions in contemporary international political economy. While recent geopolitical developments and technological innovations have intensified discussions regarding alternatives to the dollar, the long-term evolution of the global monetary system is likely to be shaped by structural economic realities rather than political rhetoric.
Scenario 1: Enduring Dollar Dominance
The first scenario envisions the continuation of dollar dominance. Despite gradual reserve diversification and growing use of local currencies, the structural foundations of the dollar’s position remain remarkably resilient. According to IMF reserve data, the dollar continues to account for a majority share of global foreign exchange reserves, while BIS surveys indicate its significant presence in international financial transactions. The depth of US financial markets, the liquidity of Treasury securities, the rule of law, and the global network effects associated with dollar usage continue to provide advantages that no competing currency currently matches. Under this scenario, de-dollarisation efforts remain limited in scope and the dollar retains its central role in global finance.
Scenario 2: The Rise of a Multipolar Currency System
A second and more plausible scenario involves the emergence of a multipolar monetary order. In this framework, the dollar would remain the leading international currency but would increasingly share space with the euro, Chinese yuan, and selected regional currencies. Scholars such as Barry Eichengreen argue that the global economy may increasingly resemble a multi-currency system rather than one characterised by a single dominant reserve currency.
The rise of local-currency trade agreements, reserve diversification, and regional financial cooperation lends support to this perspective. Rather than replacing the dollar, emerging economies are seeking to reduce excessive dependence on it. Trade settlements may become more diversified, reserve portfolios more balanced, and payment infrastructures more regionally integrated. Such a system would reduce dependence on a single currency while preserving the benefits of global financial integration.
Scenario 3: Digital Transformation of Global Finance
The third scenario centres on technological disruption. The rapid development of CBDCs, distributed ledger technologies, tokenised assets, and alternative payment networks could fundamentally alter how international transactions are conducted. Projects such as mBridge and cross-border CBDC experiments demonstrate the potential for technology to reduce transaction costs and bypass traditional intermediaries. Nevertheless, technological innovation is unlikely to eliminate the importance of trust, institutional quality, and financial market depth- factors that have historically determined international currency status.
For emerging economies, the objective should not be the complete abandonment of the US dollar but the gradual construction of a more resilient and diversified financial architecture. Policymakers must strengthen domestic financial markets, enhance currency stability, promote local-currency trade arrangements, invest in digital payment infrastructure, and deepen regional financial cooperation. A balanced approach that combines diversification with continued integration into the global financial system is likely to yield the greatest economic benefits while minimising systemic risks.
About the Contributor
Nayanshi is a Research and Editorial Intern at IMPRI and a student of Economics and Political Science at St. Stephen’s College, Delhi. Her research interests lie in international political economy, monetary and financial systems, public policy, developmental economics, welfare economics, behavioural economics and sustainable development.
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.
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Acknowledgement
The author extends sincere thanks to the IMPRI team for their guidance.
She also extends her sincere thanks to Paridhi Passi and Mehul Rastogi for their valuable feedback, useful suggestions, and support in shaping this article.
This article was posted by Yashkirti Pal, a Research and Editorial Intern at IMPRI.
