Since World War I, the dollar has become more and more important in the global economy. America’s allies started trading gold for goods they imported, which led the United States to gather the largest gold reserve in the world. After the war, many countries linked their money to the dollar, moving away from the gold standard and making the dollar the top global currency. By 1999, the dollar made up 71 percent of the world’s foreign exchange reserves. At the same time, European countries created a shared currency called the Euro.
This change started a slow decrease in the role of the dollar as the main global reserve currency. According to the International Monetary Fund (IMF), the share of dollar in global reserves dropped from 62 percent in 2010 to 58.41 percent in 2023. Even with this drop, the dollar is still the most popular currency worldwide, with the Euro in second place at about 20 percent. For instance, the Indian rupee has become much weaker against the dollar, with the exchange rate going from 4.66 rupees per dollar in 1964 to 83.4 rupees per dollar today.
In recent years, there have been clear signs of dedollarisation i.e. world is moving away from using the dollar as much. The strengthening of the dollar has adversely affected many countries, particularly developing ones. In response, the Indian government and the Reserve Bank of India have been working to increase the rupee’s role in international payments. They have made deals with about 20 countries to do this. Additionally, international transaction difficulties, particularly due to sanctions imposed on Russia by the US and European countries, have led to a rise in payments made in local currencies.
The dislike for the dollar around the world has grown, especially after the US took Russia’s dollar reserves, calling Russia an aggressor. Because of this action, other countries are looking for alternative payment methods to avoid similar risks. They are mainly trying to focus on two strategies: using their own currencies more for payments (i.e. increasing payments in local currencies) and increasing their gold reserves instead of holding dollars. For example, by early April, India’s foreign exchange reserves grew to $648.6 billion, with gold reserves reaching $55.8 billion after buying $1.24 billion worth of gold in just one week. India now has 13 tons more gold than last year, making it the 9th largest holder of gold reserves in the world. The Reserve Bank of India (RBI) has officially stated that increasing gold reserves is a top priority.
According to the World Gold Council, central banks and other institutions bought 450.1 tonnes of gold in 2021, which jumped to 1135.7 tonnes in 2022, and 1037 tonnes in 2023. This big increase in gold buying has pushed up global demand for gold. As a result, gold prices have gone up a lot, with the average price per ounce rising from $1268.93 in 2018 to $2126.82 in 2024, a 67.6 per cent increase in less than six years, or about 9.7 percent growth per year. This is much higher than the 3.61 per cent annual increase over the previous 30 years.
Several factors contribute to this trend. First, the US Federal Reserve has suggested it might lower interest rates. This usually makes investors buy gold because it is seen as a safe investment. Lower interest rates make other financial assets less appealing, so gold becomes more attractive. Second, central banks, especially in countries like China, keep buying more gold and aren’t stopping. Third, as the price of gold goes up, the value of gold reserves increases, which encourages central banks to buy even more gold.
The increasing demand for gold makes us wonder about the future of the dollar’s power. Is the time of the dollar’s dominance ending? Will gold become more important in international deals?
While we don’t have all the answers yet, it is clear that the world is moving away from using the dollar i.e. dedollarisation is on the way. More and more developing countries are using their own currencies for international trade, showing a change in the global financial system. The world is indeed heading towards a new financial era where gold could become important again as a key part or cornerstone of global currency.
