Various factors influence the volatility of the USD in countries outside the United States. One of the most noticeable and widely agreed upon by economists is the fluctuation of the Federal Reserve (the Fed) rate. Also, The Russia-Ukraine conflict has strengthened the discourse on de-dollarisation, not only at the bilateral level between nations but also at the multilateral level. At the bilateral level, Russia has agreed to use the Renminbi in trade transactions with certain countries.  

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Moreover, at the multilateral level, the BRICS countries (Brazil, Russia, India, China, and South Africa) have discussed the possibility of creating a new currency to reduce the dominance of the USD. For Indonesia, de-dollarisation is not a new concept. It has already been implemented through the Local Currency Settlement (LCS) scheme and the diversification of its national debt in various currencies.  

De-dollarization generally refers to efforts to reduce dependence on the US Dollar (USD) in international financial transactions, such as exports, imports, and debt issuances. This process can take various forms of economic policies, including using alternative currencies to the USD, establishing new payment systems, and creating financial institutions outside the US.  

Bretton Woods

As a victorious nation in World War II, the United States was interested in stabilizing the post-war global economy. This led to the establishment of the Bretton Woods System in 1944, which designated the USD as the international trade standard currency. This system also led to the IMF, World Bank, and GATT.  

The Bretton Woods System was based on a fixed exchange rate system with the USD pegged to gold. The value of one troy ounce of gold (approximately 31.1 grams) was set at $35. However, the Bretton Woods system collapsed in 1971 when President Nixon decided to delink the USD from gold, ending the USD’s convertibility to gold held by other countries. Despite the end of the Bretton Woods system, the USD’s influence on the global economy remains strong and is reflected in its volatile nature.

  USD Volatility

The volatility of the USD in countries outside the US is influenced by various factors, with one of the most significant being the actions of the Federal Reserve (the Fed). The Fed’s decisions affect the inflow and outflow of USD from a country, exposing USD holders to risks and costs. Nonetheless, the USD’s status as the most prominent global reserve currency remains unchallenged.  

The discourse on de-dollarization has existed worldwide, including in Indonesia. However, the discussion gained momentum after the Russia-Ukraine war, which resulted in Russia facing economic sanctions from the West. This situation has strengthened the BRICS alliance, particularly regarding economic cooperation. One topic gaining attention regarding the BRICS alliance is the discussion of de-dollarization, prioritizing local currencies, or creating a new common currency.  

During Xi Jinping’s visit to Moscow in March 2023, Vladimir Putin promised that Russia would use the Renminbi in trade transactions between the two countries. This move may trigger further adoption of the Renminbi in the BRICS trade. However, some Western economists doubt that de-dollarization to reduce the effects of the “toxic” USD will occur (Prepare for a multipolar currency world | Financial Times (archive. is).  

Furthermore, the dominance of the USD in global currency reserves has been declining. Over the past decade (2012-2022), the percentage of USD in international currency reserves has decreased from 61.5% to 58.4%. In contrast, other currencies like the Japanese Yen, British Pound Sterling, Canadian Dollar, Australian Dollar (AUD), and Chinese Renminbi have increased their share.  

China’s Renminbi has emerged as a dominant reserve currency, increasing global currency reserves by 1.6% from 2016 to 2022.  

Bilateral Cooperation  

In Indonesia, de-dollarization has been implemented through the Local Currency Settlement (LCS) policy. The LCS is a bilateral transaction settlement between two countries conducted in their respective currencies within their jurisdictions (Bank Indonesia).  

The implementation of the LCS partnership between Indonesia and its partner countries’ monetary authorities was driven by the high dominance of the USD in the domestic financial market. This situation posed potential risks to Indonesia’s economy from global shocks. De-dollarization is also evident in the government’s debt composition, which is now diversified in USD and the domestic currency, the Indonesian Rupiah.

The percentage of foreign-denominated debt has decreased significantly from 44-46% in 2011-2013 to 29% in 2022. Most of the debt (approximately 71%) is now denominated in Rupiah.  

In conclusion, de-dollarization is not just a hasty trend following the rise of the BRICS alliance. It is necessary to safeguard domestic economies from global shocks caused by USD volatility, driven by economic and political factors from the United States. However, any de-dollarization efforts should prioritize national economic interests, considering trade proportions and the types of commodities (strategic or regular) traded with other countries or economic blocs.  

This article was initially published on Validnews on June 21, 2023, in Bahasa Indonesia Version.