Is it Time to Talk About De-Dollarization?

In recent weeks, comments have increased regarding the strength of the US dollar in the global economy and the need, raised by some political sectors, to seek alternatives to this currency for the development of international trade.

For example, the president of Brazil, Lula da Silva, recently stated before the New Development Bank, which belongs to the BRICS group, that it was necessary to have a currency to finance trade relations between Brazil, Russia, India, China and South Africa that is different from the dollar and that reduces the dominance of the US in the global economy, an approach that China has already been developing for years.

Da Silva has also pushed for the creation of a common currency for the region, called “El Sur,” an approach supported by Argentina. Although this idea is not new and has already been tried in the past, when the Bolivarian Alliance for the Americas considered the ”Sucre” as a replacement for the dollar.

This shows that attempts to move away from a world-dominated currency are difficult to establish and implement. Just look at the example of the European Union and the consolidation of the euro. The idea of a common currency arose in 1950 and could only be reaffirmed with the implementation of the European Union through the Maastricht Treaty in 1993, entering the market in 1999 and circulating as a currency in 2002.

You Can't Ignore the Market

Efforts to have a common currency in the region or a reserve currency other than the US dollar face a series of obstacles that hinder their implementation. The World Economic Forum (WEF) itself has indicated that this attempt is unlikely to succeed in the short term.

The dollar began its position in 1920 and was consolidated as a global reserve currency in 1970, after the Bretton Woods Agreements. But the experts have already delivered their alerts.

For example, in early April, Peter C. Earle wrote for the American Institute for Economic Research (AIER) that the fate of the dollar as the "long-term world trade lingua franca may already be sealed," in an article titled, De-dollarization Has Begun.

Likewise, Gillian Tett recently said in an article for the Financial Times that the world should prepare for a “multipolar monetary” scenario.

However, although specialists speak of trends that will not change, we need to understand that the dollar continues to be key in international trade and will be present for a very long time, especially for countries like Mexico, whose foreign trade relations are historical, and the number of those countries is on the rise.

The numbers support dominance: By the end of 2021, 58.8% of central bank reserves around the world were in dollars. This, despite the fact that the appearance of the euro in 1999 and the strength obtained by other currencies, cut the US currency’s global reserve empire by 12.2% between 1999 and 2021, according to figures from the International Monetary Fund (IMF).

Don't Lose Sight of Nearshoring

The trend of relocating companies is also consolidating as a great opportunity for Latin American economies to boost their economic growth, with the arrival of companies that seek to manufacture products closer to where they are sold and reduce costs.

For Mexico, which is the country with the greatest projection in this trend, the Inter-American Development Bank (IDB) points out that the economy will be able to receive more than US$35 billion annually from nearshoring.

And yes, the dollar will be the main currency of trade between our country, the region and the target market, which is the US

Keeping the dollar  as the “common currency” for this regional trade, which will be increased by nearshoring, will further simplify international business and payments, partly reducing the risks associated with exchange rate movements.

Likewise, it will provide greater financial stability and legal confidence to companies that are betting on relocating their operations, reducing their costs and minimizing risk by not exposing themselves to a global supply chain that has not yet managed to recover from the impacts generated by the COVID-19 pandemic. 

Discussions and alternatives for commercial exchange and reserve currencies should always be on the table, since they are part of the work that we as companies and countries do to minimize economic risks. But don't let media trends distract us from our goals.

Although alternatives to the hegemony of the dollar in the global economy have been raised, its position as a reserve currency remains solid and is expected to remain so for a long time. In addition, in a nearshoring context, the dollar will continue to be the main currency of trade in the region, which provides financial stability and legal confidence to companies that are committed to relocating their operations. While it is important to discuss and consider alternatives to minimize economic risks, we must not lose sight of our goals and not allow media trends to distract us from them.