De-dollarization: Gaining momentum in Southeast Asia? 

By Victoria Hyde

De-dollarization is nothing new, but could the latest trend away from the dollar prove long-lasting? 

The US dollar has been the dominant global currency for decades, with countries around the world using it as a means to exchange, store value, and manage their respective domestic currencies. After the US emerged as a more dominant global superpower during the Second World War, the Bretton Woods Agreement of 1944 established the post-war international monetary system, with the US dollar becoming the world’s primary reserve currency for international trade. The global economic system has ultimately benefited from a strong and stable dollar, and the United States has moreover prospered from acting as the default currency to global forex liquidity. Worldwide, central banks hold significant reserves of US dollars and depend on them to manage sovereign monetary policy and capital flows. The US dollar remains the world’s most liquid and redeemable currency for facilitating world commerce. 

Is this all about to change? 

In Southeast Asia, there has been a growing trend toward de-dollarization: reducing dependence on the US dollar and diversifying foreign currency reserves.  

Why is de-dollarization happening in Southeast Asia? 

Following the invasion of Ukraine by Russia in 2022 and the swathe of Western sanctions against Russia that followed, central banks began to buy gold at the fastest pace since 1967 as countries looked to diversify their reserves away from the dollar. Commentators argue that until the US and its allies froze Russia’s currency reserves and shut it out from the SWIFT system, the idea that the dollar could lose its dominance was unthinkable. 

Seeing this as a cautionary tale of how the US dollar may be weaponized, much of the non-Western world now seek alternatives to reduce the dollar’s hegemony. For the BRICS bloc which includes Brazil, Russia, India, China, and South Africa, circumventing the sanctions requires international settlement in an alternate currency to the US dollar. Now the bloc has surpassed the G7 nations in GDP (PPP), they have made inroads at de-dollarization, specifically the implementation of a new global reserve currency that no longer allows outside control to come from the West. 

The move to de-dollarization also reflects a shift in the economic power of China and the BRICS bloc. China is Southeast Asia’s largest trading partner and is increasingly challenging the US’s dominance in the region. Increased trade connectivity contained within Asia and outside of the US has been a major driver of de-dollarization in the region. Importantly, China is encouraging the use of its currency, the Yuan, offshore, in small yet significant steps to reduce regional dependency on the dollar. 

Southeast Asia is also increasingly wary of the US and its policy decisions. The US has a large national debt, and its monetary policy decisions often have global implications. Picture it as a contagion effect: decisions in the US lead to volatility in forex markets, which can be problematic for countries that rely heavily on the US dollar for facilitating trade. The Bloomberg dollar index reached a record high in September 2022 but consequently caused multi-decade lows in the ringgit, baht, and other Southeast Asian currencies. Macroeconomic factors, combined with de-dollarization efforts, have lowered the perception of the US dollar’s strength. Looming banking crises and rampant inflation have raised concerns about the negative outlook for the US economy for regional trading partners. 

How is de-dollarization happening in Southeast Asia? 

In late March, at a meeting of finance ministers and central bank governors of the Association of Southeast Asian Nations (ASEAN), members discussed efforts to reduce dependence on major currencies through the Local Currency Transaction (LCT) scheme. An agreement to use ASEAN cross-border digital payment systems using local currencies for trade was agreed upon between Indonesia, Malaysia, Singapore, the Philippines, and Thailand in November 2022. 

In April, Malaysian Prime Minister Anwar Ibrahim met with Xi Jinping and Chinese officials to discuss an Asian Monetary Fund to reduce reliance on the dollar and the International Monetary Fund. In Parliament, Anwar affirmed that Malaysia need not depend on the dollar and that Malaysia’s central bank is working to enable China and Malaysia to negotiate on trade matters using the ringgit and renminbi. 

Following the BRICS’ lead, Indonesia has joined the growing list of countries favoring local currency for settling overseas trade. The central bank governor recently announced that the bank is actively following the lead of BRICS in de-dollarization and has implemented the LCT system.

Last week, the Bank of Thailand’s governor, Sethaput Suthiwartnarueput, announced that the bank held talks with the People’s Bank of China over supporting the use of yuan-baht settlement to mitigate foreign exchange risk amid ongoing US dollar volatility. These talks included discussion on boosting cooperation to encourage businesses to use yuan-baht settlement for trade. Under the local currency settlement framework, the Bank of Thailand has also cooperated with Japan’s Ministry of Finance, Bank Negara Malaysia, and Bank Indonesia to support the use of regional currencies for intra-Asian trade and investment. 

This trend isn’t exclusive to Southeast Asia. On 29 March, India unveiled its new foreign trade policy, which allows the use of rupees in trade with countries facing dollar shortages or currency crises. India also announced that trade between India and Malaysia will be settled in Indian Rupee. On 26 April, Argentina announced plans to use yuan to pay for goods imported from China. Argentina has also this week announced plans to settle bilateral trade in local currencies.  Iran and India signed a joint statement of cooperation to activate a rial-rupee mechanism in trade ties between them. Russia and China have recently deepened cooperation between their financial systems, with ruble-yuan trade increasing 80x in eight months. Reports released yesterday suggest that some of the world’s largest economies including Russia, Iran, Brazil, Argentina, and Bangladesh are all on the road to building up yuan reserves and shifting to trade in the Chinese currency. 

What are the implications of de-dollarization in Southeast Asia? 

For Southeast Asian countries, reducing dependence on the US dollar will by extension reduce their dependence on the US economy. 

De-dollarization may make these countries less vulnerable to fluctuations of the US dollar and policies of the US Federal Reserve. This can help them to maintain economic stability and reduce the risk of financial crises. While reducing dependence on the US, diversifying the currencies used in international trade can also strengthen regional integration and by adopting a common currency, reduce the need for currency conversions, as well as ensure lower transaction costs.

Conversely, de-dollarization could lead to increased volatility in currency markets. If multiple currencies are used in trade and investment, fluctuations in exchange rates could become more frequent, which could be problematic for businesses that operate across borders.

It is worth noting that de-dollarization does not necessarily lead to a reduction in US investment in Southeast Asia, as some commentators argue. Foreign Direct Investments (FDI) from the United States ranked top in 2022 at $40 billion, more than double China’s $14 billion.

Ideas of a Southeast Asian currency seem far-fetched, and analysts in the US say that while the dollar’s hegemony is slowly eroding, they don’t expect it to be dethroned in the near future. This, they say, reflects the lack of alternatives, with yuan reserves only accounting for about 2.5 percent of the total. In addition, the renminbi is not easily convertible due to the Chinese authorities’ strict capital controls. That said, other countries may still use local currency transactions—it offers them greater autonomy over macroeconomic stability. The Yuan is only part of their monetary diversification strategy.

While Southeast Asian countries have begun to settle trade and financial transactions in either their local currencies or the Yuan, the dollar is still alive for now. However, the jury is still out on the dollar’s lifespan given its complex interaction with other economic factors amidst uncertain global power shifts.