What Impact Will De-Dollarization Have on the World Economy?

The instability of the global economy during the COVID-19 pandemic strengthened the U.S. dollar to its highest value. Various domestic as well as international factors contributed to the rise of the USD. But as the world is thriving back to its normal pace, it is predicted that in the coming years, de-dollarization will change the whole scenario of the world economy. To discuss this in detail with simplicity we have brought the read highlighting the predicted impacts of de-dollarization on the world economy.

Why does USD hold a Pioneer Place in the World Economy?

Since World War II, the world has become whole-heartedly dependent on the global reserve currency. By that, we mean that USD is dominantly used in most of the central banks around the world for international operations and financial trade. It is appropriate to say that the USD still holds the crown of being the “safe-haven currency”. This event stands strong when markets are vulnerable and a fear crisis arises. Especially because of the Russia-Ukraine War, a potent threat has hit the world economy and alarms us of a massive energy crisis by the end of 2023.

The actual grip of the dollar is measured with U.S. Dollar Index (USDX) relative to other currencies. USDX measures Euro, Japanese Yen, Canadian Dollar, British Pound, Swedish Krona, and Swiss Franc. These mentioned currencies are not answerable to the same rate-hike policies that have been implemented in the U.S. to slow down inflation. Moreover, 11 countries of the world use USD as their official currency.

Hence the U.S. has raised its interest rates much higher than other countries and their currencies. Supply chain setbacks, China’s continuing COVID lockdowns, rising wages, and escalating oil/gas prices have all contributed to surging consumer prices.

Two Sides of a Coin

But there are also some positive impacts of full de-dollarization. We all know that a local currency is a symbol of a sovereign state and using some other nation’s currency causes a significant hazard to a nation’s pride. When a country decides to incorporate a foreign currency and stop printing its own money, it loses its control of directly influencing its economy which includes important controls like administrating the monetary decisions and any other form of exchange processes. When a country starts relying on the U.S. dollars so much, the central bank of the country loses its role as the ultimate resort for its banking system. Instead, the U.S. Federal Reserve collects the profits gained from issuing coinage and the GDP suffers a hefty loss. De-dollarization is also directly proportional to bringing both challenges and opportunities for the startup ecosystem. Startups will have much smoother access to local capital in regions shifting away from the U.S. dollar. This way startups can collect impressive domestic funding. But attracting international investments is also a prominent hindrance because of currency concerns. Transactions across borders become complex leading to higher transaction rates.

So Will the US dollar Collapse or Grow?

We have witnessed before in various parts of the world where countries have lost all the value of their currencies as a result of political instability or hyperinflation. Although it is once an age occurrence, predictions of the U.S. dollar collapsing make sense and it’s not impossible to happen. But we also need to understand that as the U.S. is the largest economy in the sworld and the status of USD is a global reserve currency, the collapse is highly unlikely. Its collapse will be like a WWIII situation coming in and chances are very slim. The US Federal Reserve signed an aggressive monetary contraction policy to fight against inflation have pulled the greenback down. The FED expects the interest rates to reach a peak of 4.75% in 2023 on all its operations and trade. Hence, de-dollarization has both pros and cons for the global economy and the startup ecosystem. So understanding these implications is important for businesses, policymakers, and investors to adapt to the evolving dynamics of international trade and finance.