Chapter 80 [Some countries have implemented de-dollarization. Will this have an impact on the U.S. dollar as the world’s international reserve currency? 】

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[James’ Origin and Today] Chapter 80 - [Some countries have implemented de-dollarization. Will this have an impact on the U.S. dollar as the world’s international reserve currency? 】(11/07/2023)

The US dollar has become the world's reserve currency because of its historical background, but it is also backed by its actual economic strength.

Why do other countries need to hold U.S. dollars, or why does one country need to hold another country's currency? The main reason is that you have trade relations with this country. But assuming you have trade with 100 countries, you don't want to hold the currencies of so many countries. That is very difficult to manage, so you may concentrate on the currencies of only a few of your main trading countries.

But there are some trading countries, mainly your exporting country, but after you get their currency, there are no things or services in this country that you can buy or need, or the country's economy and politics are turbulent, and the currency is not very stable, so you will ask to be paid in other more stable currencies, or you will immediately change it to a stronger and more stable currency after you obtain the country's currency. So in fact, you don’t want to hold the currencies of these countries. At this time, you may ask for other currencies to trade, especially if you ask for currencies that you think you will use in the future.

Although the status of the US dollar is a system determined by the Bretton Woods Conference after World War II, even without this system, a major national currency will still be used as an international reserve. The reason is the exchange rates exchanged between so many countries in the world. If there is no major reserve currency, the relationship between the currencies of 100 countries will be a huge relationship. The currency exchange volume between some countries is very small, which will produce a large exchange difference (the foreign exchange market transaction volume must be active enough to effectively reduce the exchange difference), so it will eventually be linked to one or two currencies in the world. In this way, the efficiency of exchange rate exchange will be more efficient than if each country has its own exchange rate or exchange market.

In order to achieve the efficiency of international exchange rates and currency swaps, SWIFT, the world exchange system, is a dollar-centered exchange mechanism. In this way, all foreign exchange transactions are based on this dollar-centered exchange mechanism, which simplifies and improves the efficiency of foreign exchange exchanges between many other non-dollar countries. This mechanism is dollar-centered.

When someone wants to dollarize and create another exchange mechanism, but assuming that the trade volume of that mechanism is not large, the efficiency of the entire foreign exchange gap and foreign exchange exchange will be very low (exchange must be done immediately To be able to sell, you need to be able to buy in a timely manner when buying, that is, there must be 24-hour market makers, or very frequent large-scale transactions. The U.S. dollar foreign exchange market operates 24 hours a day, and is the world's largest market, with a trading volume larger than the world's stock market, so it is very efficient.) If there is no huge market mechanism for the foreign exchange market, there will be few people trading, there will be no speculators, and there will be no arbitrage mechanism, so it will be very inefficient and the exchange rate difference will be very large.

So in summary, in addition to the historical background of the time, the US dollar as the world's reserve currency also has its actual functions. All countries in the world will definitely need to do trade and transactions with the United States, except for those countries sanctioned by the US dollar. Therefore, the countries that want to dollarize mainly need to set up another mechanism for countries subject to U.S. dollar sanctions. The trade volume will be quite small, at least so far. It may take a long time to change the reserve currency mechanism centered on the U.S. dollar. One of the most important factors is not how many countries want to dollarize. It’s about whether the United States will continue to be strong, and whether the U.S. economy and products and services will be needed by people all over the world, and the demand will be very large. When people around the world don’t need American products, the U.S. dollar’s world reserve currency will naturally decline. Instead of setting up another mechanism to compete with the U.S. dollar, it can replace the U.S. dollar. The competition between these countries is all based on strength, rather than replacing the U.S. dollar or de-dollarizing it to shake the status of the U.S. dollar.