LeoGlossary: De-Dollarization
This is not to be confused with De-dollared.
De-dollarization is when a government makes the decision to move away from the US dollar. This is the adaptation of the currency substitution process that took place earlier.
It is the decision to opt for another currency and move away from the dollar. This can also apply to USD denominated assets which are also acquired during the process of dollarization.
One of the major moves that is made during de-dollarization is that US Treasuries are sold off. These are typically acquired when a country is dollarizing. Since most global trade occurs in USD, any country running a surplus will have dollars. The easiest, and least costly, way to store them through US bonds and notes.
The advantages are:
- no exchange rate costs
- liquidity
- interest paid
- low counterparty risk
De-dollarizing does not mean that a nation returns to its currency. Often, the decision is to hold another fiat currency in its place. Many times this is reflected in the reserves the central bank holds. It could switch from holding dollars to pound sterling.
The reasons to de-dollarize are varied. However, this is usually a process that is geo-political in nature.
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