The recent US dollar decline has been the global center of debate. Various arguments surrounding whether the US dollar should be dethroned due to its frequent volatility pangs have now caught pace. Moreover, the constant US dollar weaponization is another fueling factor leading the de-dollarization talks. But has anyone considered the three dangerous risks if de-dollarization happens at a rapid pace?
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Three De-Dollarization Risks That Can Jeopardize the World
1. Global Trade Fragmentation
As menacing as it sounds, the current global trade order could turn into a shambles if the US dollar loses its current status. Most markets and deals are priced in the US dollar. With constant de-dollarization, the USD erosion could hit such markers hard, resulting in global trade fragmentation and broken trade channels. The USD is considered the anchor of the world. Without it, there can be settlement and pricing issues, multiple current wars, and high borrowing costs, which may lead to extended trade turmoil and disruptions.
2. Geopolitical Tensions
With the US dollar losing its reserve status, multiple currencies can come up to serve as alternatives. This may also spur global confusion and may end up giving birth to conflicting narratives. This may also spur transactional errors, settlement issues caused by multiple nations favoring different currencies, and so on. This could escalate trade tensions, which can disturb the current geopolitical order.
3. Higher Transaction Costs
With countries using multiple currencies, they will also have to pay higher exchange fees, which may translate to higher volatility for businesses and governments to handle and manage efficiently.
Is the Dollar Really Too Weak?
While the talk of the US dollar being weak has taken hold of the market, the stats tell a different story altogether. The US dollar is projecting a stronger outlook, with analysts stating that there’s no alternative to the king dollar in the long run.
“The dollar is back up to its strongest level since May. Two things drive that: (i) (i) the loss of reserve currency status was never realistic, as there’s no credible alternative, especially not the euro; (ii) markets got way too negative on the US economy.”
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