as an underpinning of first the pound sterling and then the U.S. dollar’s key currency role. Countries that are dependent on the U.S. for military support and arms sales and that are part of U.S. diplomatic and military alliances are more likely to hold U.S. dollars as currency reserves. This was very obvious with West Germany during the 1960s, which was totally dependent on U.S. defense, but it shows up in the data today in more subtle ways. Again, causation runs in multiple directions.
As you say, there are attempts to reduce the world’s reliance on the U.S. dollar. There are areas, particularly in Asia, where the renminbi has become used more in the denomination of trade; in Europe too, trade has been invoiced more in euros and less in dollars. So, there is a push in some areas to de-dollarize. Nonetheless, as I have already indicated, the overall strength of the dollar has remained. Part of the reason is the financial and military/political strength of the U.S.
The most common argument one hears against de-dollarization is that there is, in reality, no credible alternative, while it is often said that if countries started trading with one another in their own currencies, there would be increased currency risk and potentially wild fluctuations in exchange rates. Aren’t these sound arguments against de-dollarization?