Why kissing the dollar goodbye is not as simple as it seems

The United States dollar’s (USD’s) reign as the world’s reserve currency might be facing a rebellion, but dethroning the greenback is far easier said than done.

The desire to move away from the dollar has been growing, particularly among BRICS+ nations.

These emerging market nations are taking steps to reduce their reliance on the USD by promoting the use of local currencies in trade.

While not seeking to replace the dollar immediately or create a new currency, this approach aims to mitigate the impact of exchange rate fluctuations and foster greater financial autonomy, according to these nations.

Additionally, it hopes to leave them less vulnerable to the impact of materialised threats and sanctions against them from Uncle Sam.

However, Chief Investment Strategist at Old Mutual Wealth Izak Odendaal explained that escaping the dollar’s gravitational pull is far from simple.

Odendaal said that the push for moving away from the dollar faces several key challenges:

• Inertia of convenience: Companies “find using the dollar very convenient: the dollar is accepted everywhere, it makes accounting simple, and surplus cash can be parked in US capital markets without hassle,” which cannot be said for the yuan or the rupee, said Odendaal.
• Market infrastructure: Developing nations need to create robust financial infrastructures, including sophisticated forex derivative markets, to support their currencies on a global scale.
• Trust and stability: Factors like reckless US government debt growth and political dysfunction could undermine trust in the dollar, but other currencies need to demonstrate stability and reliability to gain global confidence.

Overall, Odendaal said that “these countries’ governments will try to encourage greater use of their own currencies, especially when trading with one another, but it is another question whether companies will follow suit.”

“To encourage this, governments will have to work on things like capital controls and developing forex derivatives markets and so on.”

Move away from the USD back in the spotlight

US President-elect Donald Trump and his economic advisers have been and are exploring ways to dissuade or punish those engaging in trade using currencies other than the dollar.

This includes export controls, currency manipulation charges, and trade levies.

Trump recently took to social media to send a warning to BRICS+ nations.

He threatened 100% tariffs on any country that seeks to replace the US dollar with another currency, stating that these nations would have to “say goodbye to selling into the wonderful US Economy.”

This highlights the potential friction on the path to a multipolar currency system.

Some experts say that while President-elect Trump’s threats should be taken seriously, they are likely more about political posturing than imminent economic action.

They believe it is unlikely he would follow through on his threat to impose 100% tariffs on countries that seek to replace the dollar.

Alan Hirsch, Emeritus Professor at the Nelson Mandela School of Public Governance at the University of Cape Town (UCT), believes the comments should be taken seriously as South Africa’s exports to the US are significant, and tariffs would have a substantial negative impact.

However, he believes that the threat is unlikely to be carried out during Trump’s presidency.

Carlos Lopes, Honorary Professor at the Nelson Mandela School of Public Governance and former UN Assistant Secretary-General, said that the shift is not about replacing the dollar immediately, “but acknowledges the inefficiencies and vulnerabilities in the current system.”

Lopes noted that while the threat to dollar dominance is overstated short-term, it aligns with long-term trends toward global diversification.

Thus, the transition away from the dollar is likely to be a gradual, evolutionary process rather than a revolutionary upheaval.

“There will be gradual diversification away from the dollar, but the emphasis is on the gradual, said Odendaal.

Thus, the dollar’s dominance is being challenged, but its deep entrenchment in the global financial system will make its displacement a slow and complex process.

Odendaal said that probably only one thing can truly accelerate this, and it is not BRICS or any choices made in Beijing or Moscow.

He said it would be if “the US government debt continues to grow recklessly, and US politics become more dysfunctional, it will undermine trust in the dollar.”

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