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.

Major Forms of De-dollarisation

• Diversification of Forex Reserves: Central banks reduce the proportion of dollar-denominated assets and increase holdings of other currencies or reserve assets. The IMF describes the long-term shift in reserves as gradual diversification away from the dollar.
• Use of Local Currencies in International Trade: Countries settle bilateral trade directly in their own currencies instead of first converting transactions into US dollars.
• Use of Alternative International Currencies: Greater use of currencies such as the euro and Chinese renminbi, as well as other currencies, reduces dependence on the dollar for international transactions.
• Diversification towards Gold: Central banks increase gold holdings to diversify their reserve portfolios.
• Alternative Payment and Settlement Systems: Countries are developing alternative cross-border financial messaging, clearing and settlement systems, reducing exclusive dependence on existing international financial infrastructure.
  • Key Systems: Russia’s SPFS (System for Transfer of Financial Messages) and China’s CIPS (Cross-Border Interbank Payment System).

Drivers of De-dollarisation

• Sanctions and Geopolitical Risk: The use of financial sanctions, freezing of foreign reserve assets and restrictions on financial channels has encouraged some countries to reduce their exposure to dollar-denominated assets.
  • Example: Following the Russia–Ukraine war, Russia faced restrictions on access to part of its foreign reserves and several Russian banks were removed from SWIFT, strengthening Russian efforts to use alternative currencies and payment channels.
• Asymmetry between US Economic Weight and Dollar Dominance: Despite the relative decline in the US share of the world economy since the post-war period, the dollar still accounts for more than half of allocated global foreign-exchange reserves.
• Aspiration for a New and More Democratic International Economic Order: De-dollarisation efforts are also a reflection of a desire to shift away from a unipolar world towards a multipolar New International Economic Order (NIEO).
• Weakening Credibility of the Dollar: The US government’s high debt burden and instances like the 2023 debt ceiling standoff have weakened this credibility.
• Quest for Monetary Autonomy: Nations are seeking to protect their economies from U.S. monetary policy spillovers. Interest rate hikes by the U.S. Federal Reserve cause capital outflows and currency depreciation in emerging markets, a vulnerability that countries aim to reduce.
• Growth of Regional and Emerging-Economy Cooperation: Emerging economies are increasingly exploring mechanisms for local-currency settlement and cross-border payment connectivity.
• Development of Alternative Payment and Settlement Systems: Countries are developing financial infrastructure that reduces exclusive reliance on established international payment and messaging channels.
  • Example: China’s CIPS (Cross-Border Interbank Payment System) facilitates cross-border RMB clearing and settlement, while Russia’s SPFS (System for Transfer of Financial Messages) provides an alternative financial-messaging channel.

Evidence of Gradual De-dollarisation

• Declining Dollar Share in Global Forex Reserves: The US dollar’s share of allocated global foreign-exchange reserves has declined over the long term.
  • 2016 → 65.5%
  • 2025 → 57.7%
• Increasing Gold Holdings: Share of gold in forex reserves increased between 2015 and 2025 in several economies, including India and China.
  • India: 5.9% → 13.1%
  • China: 1.7% → 6.7%.
• Increasing Local-Currency Trade: Countries are increasingly creating arrangements to settle bilateral trade in their own currencies rather than using the dollar as an intermediary.
• Growth of Alternative Payment Systems: China’s CIPS and Russia’s SPFS provide alternative infrastructure for cross-border settlement and financial messaging, reducing exclusive reliance on traditional dollar-centred financial channels.
• Diversification into Other Currencies: Central banks have gradually diversified part of their reserves away from the dollar towards the euro, renminbi and other reserve currencies.

Benefits of De-dollarisation

• Reduced Exposure to Geopolitical Risks: Lower dependence on the US dollar reduces a country’s exposure to dollar-based financial sanctions, restrictions on financial transactions and freezing of foreign reserve assets.
  • Example: Following Russia’s invasion of Ukraine in 2022, Western countries immobilised roughly $300 billion of Russian sovereign assets.
• Diversification of the International Monetary System: Greater use of multiple currencies reduces excessive dependence on a single currency and creates a more diversified international monetary system.
• Strengthening of Domestic and Regional Currencies: Greater use of domestic currencies in cross-border trade increases their international use and reduces exchange-rate risk arising from dependence on a third currency.
  • Example: India and the UAE have established a framework allowing bilateral transactions to be settled in INR and AED.
• Reduced Exposure to US Monetary Policy Spillovers: Lower dollar dependence reduces vulnerability to changes in US interest rates, which influence global capital flows, borrowing costs and exchange rates.
• Greater Diversification into Gold: De-dollarisation has led to a resurgence in gold as a reserve asset, providing a stable alternative to fiat currencies.
• Development of Alternative Payment Systems: De-dollarisation encourages countries to develop alternative cross-border payment and settlement mechanisms, increasing the diversity of global financial infrastructure.

Challenges Associated with De-dollarisation

• Deep Entrenchment of the US Dollar: The dollar remains deeply embedded in global trade, finance, foreign-exchange markets and reserve holdings, making a rapid shift to alternative currencies difficult. IMF data continue to show the dollar as the largest global reserve currency.
• Limited Acceptance of Alternatives: Many alternative currencies, such as the yuan and ruble, lack the global acceptance, liquidity and trust enjoyed by the US dollar.
• Transition Costs: Moving towards alternative currencies requires changes in payment infrastructure, financial contracts, accounting systems and hedging arrangements, creating additional costs for governments, banks and businesses.
• Reserve Diversification Risks: Moving reserves into alternative currencies or gold does not eliminate risk. Alternative currencies remain exposed to exchange-rate movements, while the market value of gold fluctuates with global prices.
• Existing Dollar-denominated Debt: Governments and businesses with dollar-denominated debt still need dollars to make interest and principal repayments, limiting the speed of de-dollarisation.
• Geopolitical Tensions: Reducing reliance on the U.S. dollar could create political friction and be viewed as a challenge to U.S. economic influence.