Currency Wars, De-dollarisation & Global Reserve Shift
US Dollar’s Dominance • Weaponisation of Finance • Rise of Gold & Local Currencies • India’s Rupee Strategy
1. Core Concepts – Currency War, De-dollarisation & Reserve Currency
(a) Currency Wars
Currency war refers to a situation where countries deliberately try to depreciate their currencies (or prevent appreciation) to gain competitive advantage in exports, growth and debt management. It typically involves:
- Large-scale monetary easing / QE to push interest rates down
- Foreign exchange intervention by central banks
- Use of capital controls to manage inflows and outflows
(b) De-dollarisation
De-dollarisation means a reduction in the use of the US dollar in international trade, finance, reserves and payments, and a shift towards other currencies, gold or digital alternatives. It is usually driven by:
- Fear of US financial sanctions and freezing of reserves
- Desire to de-risk from dollar volatility and US domestic politics
- Emergence of regional powers and alternative payment systems
(c) Reserve Currency & Global Reserve Shift
A reserve currency is a currency held in significant quantities by central banks as part of their foreign exchange reserves and used in international transactions. Since World War II, the US dollar has been the dominant reserve currency. However, its share in global reserves has gradually declined, and central banks are diversifying into euro, yen, yuan, smaller currencies and gold.
flowchart TB WM[IASNOVA.COM] A[Global Monetary Order] --> B[Dollar Centred System] B --> C[Currency Wars - Competitive Devaluation] B --> D[De-dollarisation - Reserve Diversification] D --> E[Gold, Euro, Yuan and Smaller Currencies]
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2. Evolution of Dollar Dominance – From Bretton Woods to Weaponisation
Post-1944, the Bretton Woods system made the dollar the anchor currency, backed by gold. After the 1971 “Nixon Shock” (end of gold convertibility), a petro-dollar system evolved, with oil and key commodities priced in USD. Deep US financial markets, military power and network effects entrenched dollar dominance.
| Phase | Key Events | Implication for Dollar |
|---|---|---|
| 1944–1971 | Bretton Woods; fixed exchange rates; dollar convertible into gold | Dollar becomes formal anchor of global system |
| 1970s–1990s | End of gold link; oil priced in USD; Eurodollar markets rise | Dollar evolves into petro-dollar + financial dollar |
| 2000s–2010s | US QE after Global Financial Crisis; China’s rise | Talk of currency wars; emerging markets worry about volatility |
| 2020s | Sanctions on Russia’s reserves; trade & tech wars; BRICS activism | Weaponisation of finance accelerates de-dollarisation efforts |
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3. How Do Currency Wars Work in Practice?
(a) Policy Toolkit
| Instrument | How It Works | Intended Outcome |
|---|---|---|
| Interest Rate Cuts & QE | Large-scale bond purchases push yields down, weaken currency | Boost exports, asset prices, growth |
| FX Intervention | Central bank buys foreign currency, sells domestic currency | Prevents appreciation, supports exporters |
| Capital Controls | Limits on inflows/outflows, taxes on “hot money” | Reduce volatility, preserve autonomy |
| Tariffs + Financial Sanctions | Trade restrictions combined with asset freezes, SWIFT bans | Pressure rivals; can fragment monetary system |
flowchart TB WM[IASNOVA.COM]:::wm A[Currency War] --> B[Lower Rates & QE] A --> C[FX Intervention] A --> D[Capital Controls] B --> E[Weaker Currency] C --> E E --> F[Export Push + Debt Relief]
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4. Drivers of De-dollarisation in the 2020s
De-dollarisation today is gradual and selective, not a sudden collapse. Major drivers include:
- Sanctions risk: Freezing of major-country reserves and SWIFT exclusions encourage others to diversify into gold and non-dollar currencies.
- Geopolitical polarisation: Deepening divides between US-led alliances and blocs like BRICS+ push local-currency trade and new payment systems.
- US debt & political risk: Rising debt, repeated debt-ceiling dramas, and tariff wars raise questions about long-term safety of dollar assets.
- Technological change: CBDCs, fintech and alternative cross-border systems make diversification operationally easier.
flowchart TB WM[IASNOVA.COM]:::wm A[De-dollarisation Drivers] --> B[Sanctions & Weaponisation] A --> C[Geopolitical Polarisation] A --> D[Tech: CBDCs, New Rails] A --> E[Macro & Debt Concerns] B --> F[Gold & Non-USD Assets] C --> G[Local Currency Trade] D --> H[New Payment Systems]
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5. Evidence of Global Reserve Shift – What Do the Numbers Show?
(a) Changing Reserve Currency Shares
IMF COFER and central bank data show that the dollar’s share of disclosed official FX reserves has:
- Fallen from around 70–72% in the early 2000s to about 58% by 2024, and further towards the mid–50s in 2025 (valuation effects plus diversification).
- The euro stabilised near 20%, while the Chinese renminbi remains small at around 2–3%, though slowly rising.
- Shares of “other currencies” (NOK, AUD, CAD, etc.) and gold have increased as diversification vehicles.
| Currency / Asset | Approx. Share in Global Reserves (2024–25) | Trend |
|---|---|---|
| US Dollar (USD) | ~56–58% | Gradual decline from ~70% in early 2000s; still dominant |
| Euro (EUR) | ~20% | Stable / slight recovery post-Euro crisis |
| Yen, Pound | ~10–12% combined | Broadly stable |
| Chinese Yuan (RMB) | ~2–3% | Slow but steady rise |
| Other Currencies | ~5%+ | Diversification into smaller but stable currencies |
| Gold (as reserve asset) | Separate from COFER but rising sharply | Record central bank purchases since 2022 |
(b) Central Bank Gold Rush
Since 2022, central banks – especially in the Global South – have bought over 1000 tonnes of gold annually, marking the strongest official-sector gold demand in modern history. This is explicitly framed as diversification away from dollar assets and sanctions risk.
flowchart TB WM[IASNOVA.COM]:::wm A[Global Reserves] --> B[USD ~ 56–58%] A --> C[EUR ~ 20%] A --> D[RMB & Others] A --> E[Gold Holdings] E --> F[Hedge vs Sanctions & USD Risk]
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6. BRICS, Regional Banks & Alternative Architectures
Alongside reserve diversification, new Southern-led financial architectures have emerged:
- BRICS & BRICS+: Push for use of local currencies in intra-BRICS trade (e.g., yuan–ruble, yuan–real, rupee-based trade with Russia).
- New Development Bank (NDB): Equal-voting development bank lending in local currencies, symbolising South–South cooperation.
- AIIB, regional swap lines, CIPS etc.: Provide non-dollar channels for finance and payments.
- Debate on a BRICS currency / digital unit: Proposals for a new unit of account or blockchain-based settlement system to reduce dependence on USD in the long run.
| Initiative | Type | De-dollarisation Relevance |
|---|---|---|
| BRICS Local Currency Trade | Trade settlement in national currencies | Reduces need for USD in intra-BRICS trade |
| NDB & AIIB | Multilateral development banks | Offer loans in local currencies; diversify funding channels |
| BRICS Currency Proposals | Conceptual – digital / basket currency | Long-term idea to challenge dollar’s pricing role |
| Alternative Payment Systems | CIPS, SPFS etc. | Reduce vulnerability to SWIFT-based sanctions |
flowchart TB WM[IASNOVA.COM]:::wm A[Dollar-Centred System] --> B[BRICS Local Currency Trade] A --> C[NDB & AIIB Loans] A --> D[Alt. Payment Systems] A --> E[Proposed BRICS Currency] B --> F[Lower USD Share in Trade] C --> F D --> F
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7. India’s Perspective – Rupee, De-dollarisation & Strategic Balancing
(a) Rupee Internationalisation Measures
India supports a multipolar currency order but also benefits from the stability of the existing system. Recent steps by RBI and Government include:
- Framework for Special Rupee Vostro Accounts (SRVA) to allow trade settlement in INR for willing partners (since 2022, with further relaxations in 2025).
- Allowing surplus rupee balances in SRVAs to be invested in Government securities to make INR holdings more attractive.
- Broad-based measures to promote rupee use in trade and investments, alongside deepening of GIFT–IFSC as a global financial hub.
(b) India Between Dollar System & BRICS Push
- India remains deeply integrated with the dollar-based system (trade, capital inflows, reserves) and cannot suddenly exit it.
- At the same time, India participates in BRICS, NDB, AIIB and rupee-based trade with Russia and other partners, signalling support for de-dollarisation at the margin.
- Policy priority: monetary sovereignty + macro stability rather than ideological anti-dollarism.
flowchart TB WM[IASNOVA.COM] A[India] --> B[Dollar System - Trade Capital and Reserves] A --> C[BRICS NDB and AIIB] A --> D[Rupee Trade and SRVAs] D --> E[Gradual Rupee Internationalisation]
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8. UPSC Prelims Booster – Quick Facts & Trick Statements
| Statement | UPSC-Type Assessment |
|---|---|
| (1) De-dollarisation means the US dollar is no longer used at all in world trade. | Incorrect – it means reduced dependence, not complete exit. |
| (2) The US dollar still accounts for the largest share of global FX reserves. | Correct – share is falling but remains above 50%. |
| (3) Central bank gold buying since 2022 is partly motivated by sanctions risk and diversification away from dollar assets. | Correct. |
| (4) De-dollarisation is driven only by BRICS and low-income countries. | Incorrect – even advanced economies diversify at the margin for risk management. |
| (5) A currency war always leads to higher growth for all participating countries. | Incorrect – can trigger retaliation, volatility and financial instability. |
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