Following the Covid-19 pandemic in 2022 and Ukraine Russia war, global inflation rose to a record high. Inflation in the US also rose to its highest level, 8.5%, since 1982. Thus, just as other countries, the US boosted its policy rates multiple times and increased money supply to combat inflation; as a result, it was clear that the dollar would lose value.
However, the US dollar is not merely a common currency in a single nation; rather, it has benefited from its status as the world's reserve currency. Therefore, a drop in US value affects the entire world. The dollar's dropping value has drawn attention because of this, and it has to be thoroughly investigated in order to improve policy formulation.
Decline in the purchasing power of the dollar
1971 is not remarkable only for the birth of an independent country, Bangladesh, but it is also noteworthy as the year in which the United States failed to uphold the Bretton Woods Agreement's fixed exchange rate of the dollar against gold. Thus, the switchover from a fixed to a floating currency system began globally in 1971.
Since then, the value of the dollar has been decreasing. $1 in 1971 is equivalent to around $7.43 in today's currency, a $6.43 increase in 52 years, in terms of purchasing power. The dollar has had an average yearly inflation rate of 3.93% since 1971, translating into a cumulative price increase of 642.81%.
This number is obviously alarming, because the dollar serves as the world's reserve currency. Depreciation of the dollar will therefore have a direct effect on the value of reserves held by other countries. In order to protect themselves from the possibility of de-dollarization, many nations are searching for an alternative system. It appears that de-dollarization is being caused by more than just inflation, though.
Decline of dollar hegemony and the beginning of de-dollarization
The US has a definite impact on how the global monetary system operates, thanks to the economic and political concept of dollar hegemony. The US has been leveraging its hegemony to sway other countries' judgments. However, as the world transitions from uni-polarization to multiploidization, the hegemony is now in jeopardy.
The core reason why the US was able to use dollar hegemony is because of the unipolarity (one nation holds a preponderance of power and has no rival nations). However, Covid-19 and the Russia-Ukraine conflict changed the geopolitical landscape and made it challenging for the US to maintain its unipolar status. That is why, it is getting harder for the US to maintain its dollar hegemony -- this shift towards multipolarity (a power structure in which more than two nation-states have about equal amounts of influence is emerging).
The US's role as a reserve currency was another factor that allowed it to maintain hegemony. But the dollar's acceptance as a reserve currency is also dwindling. For instance, in 2000, US dollars made up almost 70% of the world's foreign exchange reserves. That percentage had decreased to just under 60% as of 2021.
The International Monetary Fund (IMF) has remarked that more "nontraditional currencies" from smaller nations are being retained in international reserves. For a healthy economy, nations are also returning to the gold reserve system.
Nevertheless, one primary cause of the declining value of dollar is the diminishing attractiveness or demand of the currency. Countries are attempting to use currency swaps for international trade instead of the dollar. For instance, commerce in Indian rupees is permitted with 18 nations, including the UK, Germany, Singapore, and Sri Lanka. Similar to this, China has pacts with 41 nations for the settlement of bilateral trade in yuan.
In regional trade blocs with close trading ties, this technique is becoming more prevalent. On the other hand, the BRICS are growing and attempting to establish their own currency to ease trade between them by lowering the dollar.
However, more nations desire to de-dollarize, not because it is economically sensible, but rather to escape the dominance of the US foreign policy, which over the past 20 years has increasingly turned the dollar's dominance in the world into a weapon. For example, the rapid freezing of $600 billion in Russian reserves conveyed a message to other nations that the US might use its currency as a tool for international policy. These factors have all accelerated the de-dollarization era.
What should Bangladesh do?
A weaker dollar buys less in foreign goods. This increases the price of imports, contributing to inflation. Thus, even after dealing with the inflation arising from the domestic factor, Bangladesh has to deal with the inflation that arises from the dollar devaluation. As dollar loses its purchasing power, it becomes more difficult for Bangladesh to be in a favourable position in international trade. It is one of the reasons why low global prices of fuel, oil, or other utensils hardly benefits Bangladeshi consumers.
It is a relief that Bangladesh has gold reserves in addition to its foreign currency reserves. The nation reported 14.03 tons of gold reserves at the end of 2022. Additionally, the nation is preparing to implement currency swaps. Since the beginning of the year, Bangladesh has been working with India to streamline the terms and conditions of the Indian Line of Credit (LoC) to Bangladesh to facilitate prompt repayment.
Bilateral commerce in currencies other than the dollar will relieve strain on the nation's dollar reserves. Moreover, Bangladesh's central bank permits financial firms to settle trade agreements with China in yuan in an effort to diversify its foreign exchange holdings. These actions show that Bangladesh is taking steps to protect itself against de-dollarization.
However, Bangladesh needs to be cautious and develop a long-term plan to boost its economy. It must carefully examine its current account standings, research its bilateral relationships with other nations, and attempt to engage in currency swaps that are advantageous to the national economy.
Future predictions are also required. For example, Africa will likely have a larger market in the future because of its high birthrate compared to other nations, and thus it will have a large number of potential clients. As a result, Bangladesh must consider this and search for ways to conduct trade with Africa using its own currency, just like China.
In addition, Bangladesh should think about cooperating with ASEAN and keeping its ties with nations like India, China, Japan, and the Middle East in order to maintain a strong position in the area. The nation must prudently handle its bilateral relations if it is to avoid suffering from the dollar's diminishing value.
Dr Ashraful Alam Chowdhury is an independent researcher and columnist.
