In recent months, the U.S. has seen its currency face de-dollarization. De-dollarization refers to the reduced dependency that other countries have on the U.S. dollar for matters of currency exchange, trade, and other international economic business.
In December, a number of countries began showing interest in using India’s rupee for international trade. These countries include—but are not limited to—Cuba, Sudan, Luxembourg, Sri Lanka, and Mauritius.
In January of this year, Iran and Russia entered into talks regarding the creation of a cryptocurrency backed by gold to circumvent the use of the U.S. dollar.
Most recently, China and Brazil have agreed to trade using the Chinese yuan and the Brazilian reais.
The U.S. and its allies also froze $300 billion worth of Russian assets following their invasion of Ukraine. Other countries may fear that they, too, will see their own finances frozen if they upset the U.S., which could potentially instigate more countries into abandoning the U.S. dollar as its sole currency for international trade.
De-dollarization—coupled with the Russia-Ukraine War—has led to a weaker U.S. dollar when compared to other currencies, such as the Euro, and there is evidence to prove a downward trend in the strength of the USD.
In 2021—the year prior to Russia’s invasion of Ukraine—the average exchange rate for 1 USD was 0.8458 EUR. The average exchange rate in 2023 as of June 2 is 1 USD for 0.9248 EUR, a decrease in USD value by nearly 8% in the European market.
The U.S. dollar remains the most used currency for global foreign exchange, with a total of 60% of all currency reserves being in USD. Nevertheless, there is an upward trend in de-dollarization. In 2001, 71% of all currency reserves were held in USD. That is a drop of 10% in just over two decades. So what does the loss of power for the U.S. dollar mean for the American economy?
As a result of de-dollarization, the federal government has begun raising interest rates. This comes on the back of a difficult year of supply chain disruptions as a result of COVID-19, the effects of the Russian-Ukrainian War, and labor shortages: all of which have stagnated the flow of money. And while those rising interest rates may make you feel good as you watch your investments garner greater interest month-by-month, they do not indicate a healthy economy.
For comparison, the Great Depression of the 1920s and 1930s was prefaced by rising interest rates (among other variables that led to the economic downturn). Economists today believe that the continuous interest rate increases issued by the federal government will lead to a recession. While less severe than a depression, a recession still indicates poor production and employment rates. The American people may have a few extra dollars in their pockets, but that extra change is not indicative of positive economic growth or stable employment.
Instead, Americans should find ways to save their money in the unfortunate chance that a recession will hit. Building an emergency fund, limiting expenses and budgeting, and paying off debts are all methods through which U.S. households can not only limit their expenses but also ensure that they are financially ready for a recession.