DeDollarisation a World Altering Phenomenon

By: Lachlan Rowden

As of 2023 the US dollar has been the main reserve currency for the world, with the dollar accounting for 60% of currency reserves held by central banks around the world. However recently global alliances such as the BRICS group has made an attempt to dethrone the US dollar as the global currency in an attempt at de dollarisation. 

What could this mean for global markets and even local economies?

The good:

Decreased inflationary pressures on global markets lowers the uncertainty, fear and interest expense in the market. As countries in the BRICS alliance such as China move away from the US dollar more certainty will be brought to investors. This certainty decreases high volatility, increasing the sustainability of companies inside that market. Higher sustainable growth in markets increases the expansion of companies allowing for higher returns for investors. Furthermore decreased inflation in a market allows for increased cash flow as the cash in a business has more purchasing power. This protects and increases the cash flow margins of a business decreasing the chance of that business defaulting on its legal obligations. Due to the cash flow being higher and inflation being less centralized the interest expenses that a company has are expected to decrease as a company should have lower debt with lower interest rates on that debt. Because of this the overall interest expense a company has should be lower increasing net income.   

The ugly:

Heightened exchange rate volatility hinders international investment. Hindered international investment decreases capital flow in a stock market reducing investment capital, operation spending, and research and development. From the reduced capital markets can be expected to face slower growth. Due to this slower growth companies in markets which have de dollarised will struggle to innovate and keep up with their dollarised competitors making it harder for international investors to invest in de dollarised locations when there are higher returns in other places. In addition to this because of high exchange rate volatility, the risk of money through an exchange rate increases, potentially leading to higher losses. These higher losses can scare investors, decreasing the amount of capital flowing through an exchange rate in turn increasing the cost to import and export in dollarized countries.