HEATH MUCHENA: What move away from dollar would mean for global economy

For decades the dollar has held a position of unparalleled dominance in international trade and finance. The petrodollar system, established in the 1970s, cemented this status, creating a world in which oil and other commodities were traded exclusively in dollars. However, recent geopolitical shifts and the rise of alternative currencies signal a potential end to this era.

The petrodollar system was born in 1974, three years after the collapse of the Bretton Woods agreement, which had pegged major currencies to the dollar, itself convertible to gold. In a masterstroke of diplomacy, then US secretary of state Henry Kissinger secured an agreement with Saudi Arabia, ensuring that oil would be traded exclusively in dollars. This arrangement was mutually beneficial. The US guaranteed military protection for the Saudi kingdom, while Saudi Arabia and eventually all Opec countries agreed to price their oil in dollars and invest their surpluses in US debt. 

This system reinforced the dollar’s position as the world’s primary reserve currency. Countries needed dollars to purchase oil, ensuring constant demand. However, this set-up also made the global economy heavily reliant on the dollar, tying international financial stability to the fortunes of the American economy.

In recent years several factors have catalysed a shift away from dollar dominance. Geopolitical tensions, particularly between the US and countries such as China and Russia, have prompted these nations to seek alternatives to reduce their exposure to US financial influence. For instance, in 2023 Saudi Arabian finance minister Mohammed al-Jadaan announced at the World Economic Forum that the kingdom was open to trading in other currencies, including the Chinese yuan. 

This move was indicative of a broader trend. Countries such as Russia and China have been actively promoting their currencies in international trade. Russia, facing Western sanctions, has increasingly used the yuan for its oil exports. Similarly, China’s Belt & Road Initiative encourages the use of the yuan in trade, further challenging the dollar’s dominance. 

Not unprecedented

The rise of cryptocurrencies such as bitcoin offers a decentralised alternative to traditional currencies. Bitcoin’s appeal lies in its borderless nature and resistance to government control, making it an attractive option for countries and individuals looking to bypass the dollar-centric financial system. 

The decline of the dollar as the global reserve currency would not be unprecedented. History is replete with examples of dominant currencies losing their status. The Portuguese real, the Spanish real, the Dutch florin and the British pound all enjoyed periods of dominance before being supplanted. Each of these transitions was driven by a combination of economic, political and technological changes.

The pound was the world’s reserve currency until the mid-20th century. The aftermath of World War 2 and the economic rise of the US facilitated the dollar’s ascension. Similarly, shifts in global economic power, technological advancements and geopolitical realignments are creating conditions ripe for another transition. 

A move away from the dollar would have profound implications for the global economy. One immediate consequence could be increased volatility in financial markets. As countries diversify their reserves away from dollars, demand for US treasuries could decline, leading to higher borrowing costs for the US government. This could worsen fiscal challenges and potentially lead to a weaker US economy. 

For the global economy, dedollarisation could mean a more fragmented financial system. A multipolar currency world may emerge, in which the dollar, euro, yuan and possibly cryptocurrencies share the role of global reserve currencies. This could lead to increased transaction costs and complexity in international trade and finance. 

Protect wealth

Bitcoin presents a compelling alternative to traditional fiat currencies. Its decentralised architecture ensures it is not subject to the whims of any government. Bitcoin’s finite supply, capped at 21-million coins, provides a hedge against inflation, a stark contrast to fiat currencies, which can be printed at will by central banks. As more institutional investors and countries recognise bitcoin’s potential as a store of value and medium of exchange, its adoption is likely to increase. The trading of bitcoin on digital global platforms such as PrimeXBT, where crypto traders can trade perpetual contracts, contracts for difference and foreign exchange has also been on the rise.

As the global financial landscape evolves, individuals and investors need strategies to protect their wealth. Diversification is key. Allocating assets to a mix of traditional currencies, cryptocurrencies such as bitcoin and other assets such as gold can mitigate the risks associated with the debasement of any single currency. 

Additionally, investing in decentralised finance platforms offers exposure to innovative financial products that operate outside traditional banking systems. These platforms provide opportunities for earning interest, borrowing and lending in a decentralised manner, further insulating investors from the risks associated with fiat currency debasement. 

The decline of the dollar’s dominance is not an overnight phenomenon but a gradual process influenced by geopolitical, economic and technological changes. As countries seek alternatives to the dollar the global financial system is poised for significant transformation.

While the exact trajectory of this transition remains uncertain, one thing is clear: the era of unquestioned dollar dominance is waning. In this new landscape, adaptability, diversification and a keen understanding of emerging financial technologies will be crucial for navigating the challenges and opportunities that lie ahead. 

The shift, driven by geopolitical realignments and technological advancements, will reshape the global economic landscape, creating challenges and opportunities for countries, businesses, and individuals. Embracing these changes and adopting proactive strategies will be essential for thriving in this evolving financial ecosystem. 

• Muchena is founder of Proudly Associated and author of ‘Tokenized Trillions’, ‘Why Emerging Markets’ and ‘lockchain Applied’.