THE ongoing enthusiasm surrounding "de-dollarisation" is unlikely to gain significant traction within the Association of Southeast Asian Nations (Asean), given practical and political considerations.
We should be cautious against hasty measures that could complicate trade dynamics within the bloc and with its external partners.
The undeniable success and stability brought by the dollar as the global reserve currency, but recent challenges arise as China, a key strategic rival to the US, aims to challenge the dollar's supremacy.
China's ambition to dethrone the dollar, advocating for caution amid discussions of potential replacements such as the yuan or a yet-to-be-announced newly created reserve currency.
The fact of the matter is many countries are happy to hold and trade in dollars as it reduces exchange rate risk since there's no need for a country to exchange its currency for the reserve currency to do trade.
Trade using a strong, dependable and reliable currency makes sense and is likely to remain a cornerstone of Asean policy going forward. The risk that we see emerging, however, is a "forced" de-dollarisation, with China attempting to push Asean states to conduct trade with China in yuan.
This is being done to score points against the US, not to improve the way trade is conducted.
The main factor in China's "yuan for Asean" drive is the effectiveness of sanctions that have been imposed against Russia since the outbreak of war in Ukraine:
China sees that its trade with Asean could take a hit in the event of a conflict over Taiwan. However Asean states are not blind and realise that abandoning the dollar opens them to even more economic coercion especially over their claims in the South China Sea.
China will place an emphasis on yuan currency settlements with neighbouring countries and the development of offshore centres as its next steps to promote the greater use of the Chinese currency overseas, its central bank said in 2022.
As China endeavours to position the yuan as a global reserve currency and a credible alternative to the dollar, the inherent challenge lies in the tight control exerted by Chinese authorities over its exchange rate.
Despite these aspirations, the yuan's appeal to foreign investors has waned due to recent depreciation concerns and a domestic economic deceleration.
The substantial capital outflows coupled with aggressive rate hikes by the US Federal Reserve led to a depreciation of the yuan by over 10 per cent against the US dollar last year. This prompted a significant initiative to integrate the yuan into China-Asean trade, reflecting the intricate dance between global currencies and economic forces.
We should be cautious against the "hype" over de-dollarisation. Asean states, rather than jump on the bandwagon, are likely to cling onto the dollar as a means of retaining leverage and sovereignty against China's predatory trade practices.
There is already a huge imbalance in trade between Asean and China. China has also demonstrated that it has no qualms about using economic pressure to get its way and push its agenda in Asean.
Switching from the dollar to the yuan or any other currency dominated by China is obviously going to put Asean in an even weaker position. There could be a pushback against attempts to settle bilateral trade in yuan and local currencies.
Other countries are already running into currency oversupply problems, with Russia now having too many rupees and yuan, and being unable to trade with the currencies beyond India and China.
Asean itself is well aware of the fact that this "trend" is largely due to geopolitical power plays by antagonists of the West, led by China and to a lesser degree Russia, who are attempting to highlight how they are settling limited transactions in local currencies, but in reality are running into difficulties..
Russia finds itself with substantial rupee holdings in Indian banks, yet it grapples with the challenge of finding avenues to convert this currency.
Simultaneously, India has issued advisories to banks and traders, discouraging the use of the Chinese yuan as a mode of payment for Russian imports.
This scenario underscores the complexities and challenges associated with conducting trade in local currencies instead of the dollar, revealing the intricacies that emerge when navigating the global economic landscape.
In its Asean briefing, Dezan Shira & Associates, a pan-Asia, multi-disciplinary professional services firm reaffirmed caution against de-dollarisation: "To be clear, the US dollar is still the dominant currency among global forex reserves, accounting for some 58 perc ent of the reserves in the fourth quarter of 2022.
"The euro is second and accounts for 20 percent of global forex reserves... However, despite the slow erosion of the US dollar's dominance, analysts say the currency will not be dethroned in the short term, mainly because there are no real alternatives."
In the final analysis, Asean appears poised to adopt a cautious stance amid the fervour surrounding de-dollarisation.
The regional bloc seems inclined to hedge its bets, showing a pragmatic approach in the face of the hysteria surrounding moves away from the US dollar.
Asean is unlikely to fully embrace de-dollarisation due to practical and political considerations, emphasising the need for restraint to avoid complicating trade dynamics within the bloc and with external partners.
The region recognises the historical success and stability brought about by the dollar as the global reserve currency but remains wary of potential disruptions amid shifts in the global economic landscape.
*The writer currently serves as a senior consultant at Global Asia Consulting and has a background as a senior researcher at the Malaysian Institute of Economic Research. The viewpoints articulated are solely those of the author.