With the rise of the post-WW2 economic order, many countries have had to adapt to a global economic order dominated by the dollar. The US had the world’s largest and most liquid financial markets, played a pivotal role in the global oil market and the dollar dominated cross-border trade. A network effect was created where the ubiquity of the dollar made it the default choice for numerous transactions. The Euro was created in part to provide a counterweight to the dollar but shifted a relatively small share of trade away from the dollar. Countries have long been resigned to the dollar as the de facto world currency.

As geopolitical tensions rise, countries in Southeast Asia are beginning to see the potential benefits of diversifying their currency exposure and minimizing their vulnerability to financial shocks and economic sanctions. This research paper goes over the dollarisation landscape of ASEAN nations and examines each region’s efforts to reduce their reliance on the US dollar. This study begins by explaining the history of the dollar’s dominance and the definition of dollarization. It then delves into the current level of dollarisation of each of the ASEAN countries. It then goes over the numerous cases of trade and domestic dedollarisation in Southeast Asia, and the extent to which they are contributing to dedollarisation. The study then ends with a brief summary and a potential alternative to dedollarization as a whole.

Numerous countries have looked for ways to promote the stability of their currency since the Bretton Woods Conference after World War II (Victoria Hyde, 2023) . Initially, the most common method for achieving such stability was to peg their local currency’s exchange rates to an anchor currency like the US dollar. However, a supplement to pegging which has gained traction over the past few decades is to supplement the country’s local currency with the secure and stable dollar. This is known as dollarisation.

As seen in Chart 1, this is a global phenomenon, with the US dollar representing approximately 60% of total foreign exchange reserves globally in 2023.

Dollarization offers emerging markets a number of advantages, including a decline in inflation rates, a decrease in transaction costs, the removal of depreciation risk, ease of trade and transaction, and the development of a solid foundation for a sound financial sector.

Such comforts do, however, come with their fair share of drawbacks. A nation that does accept the dollar loses control over its interest rate and money supply. By embracing the US dollar, the country’s monetary authority relinquishes control over its interest rate and money supply. The dollarized economy would also lose revenue from seigniorage, that is, the profits earned by the government from issuing their own local currency. The exports and imports of the dollarized country are also affected by any change in US monetary policies.

Chart 1. US dollar continues to dominate global foreign exchange reserves. Source: IMF (International Monetary Fund: https://www.imf.org/en/Home).

There is currently a great diversity of dollarization levels among Southeast Asian nations currently. Currency regime types in the region run the range from currency boards and stabilized arrangement—effectively heavily dollar-based regimes—to freely floating exchange rates that signify a relatively low level of dollarisation (Table 1).

Invoicing of trade remains heavily dollar-based, with the vast majority of both exports and imports denominated in dollars. Even countries with relatively less dollarisation such as Malaysia and Thailand see more than three quarters of their trade denominated in dollars (Chart 2).

The chief reason countries are starting to reduce exposure to the USD for trade and financial transactions is to achieve monetary policy independence. Relying heavily on the dollar makes a country’s economy vulnerable to US monetary policy fluctuations and other U.S. government policies such as trade and investment sanctions. Changes in the US economy, monetary or trade policies, and fiscal reforms can also have an outsized impact on the dollarised country. Fluctuations in the value of the dollar can have a serious influence on inflation rates, trade, and the overall economy of the dollarised country. In addition, Russia’s invasion of Ukraine has triggered a wave of financial sanctions on Moscow by the US and other western countries. The most significant among them has been the decision to freeze nearly $300 billion of Russia’s foreign currency reserves. Similarly, if another country perceives an increased risk of sanctions or economic instability due to such conflicts, it might accelerate efforts towards dedollarisation to reduce vulnerability to such economic sanctions.

Source: IMF (International Monetary Fund).

Chart 2. Dollar continues to dominate in trade invoicing. Source: Boz et al. (2020) , “Patterns in Invoicing Currency in Global Trade,” IMF Working Paper 20/126. https://t.ly/H7MKg.

There are a number of methods of fostering dedollarization, ranging from complete currency substitution (rarely seen in ASEAN nations) to systems that limit the use of foreign currencies. The leaders of ASEAN countries have increased their focus on promoting the use of their local currencies and believe that it will improve intra-ASEAN trade and transactions. There have been two sets of initiatives—one focusing on cross-border settlement of transactions in local currencies, and another focusing on the dedollarisation of the domestic economy (Chart 3).

An oft-asked question today is which currency will replace the dollar? For decades, people have been looking for an alternative global currency to the dominating US dollar. Maybe the Euro, maybe the Yuan, maybe the Japanese Yen, maybe Bitcoin, Ether or any such digital currency, but what if that is the wrong question to ask? Why does there have to be an alternative? Take the example of translation across languages. Instead of everyone in the world having to learn a globally accepted language such as English, there have been numerous technological solutions, such as Google translate, to deal with language barriers. Similarly, such as the already existing LCT in Indonesia, Rupee Vostro accounts and QRIS system.

Economists, businesses, and policymakers have been looking for alternatives to the dominance of the US dollar for some time now. After analyzing the Euro, the Yuan, cryptocurrencies and other such alternatives, no definite conclusion has been reached. But what if the question being asked is incorrect? What if this approach towards dedollarisation should not involve the replacement of the dollar with another single currency? Rather, it may be possible that recent technological advancements can facilitate the advancement of local currency transactions such that the USD is not involved at all. With LCT, NETS—DuitNow QR, digital Yuan and MoUs between Southeast Asian nations all serving to answer this question, such a technologically driven financial landscape may not be that far away.

In the foregoing article, we have only touched on one region of the world and its efforts to create alternative transaction mechanisms. Other parts of the world including Latin America and regions within Africa have also attempted to reduce the dollar’s influence. Examining their experiences could shed additional light on the opportunities and limitations of the advances in technology used by Southeast Asian nations.

I would like to express my sincere gratitude to Mrs. Tani Fukui for her unwavering support and guidance throughout the course of this research project. Her expertise and approach towards the ever changing economy greatly enriched the quality of this paper. This project would not have been possible without the time and effort Mrs. Fukui put in, and I am extremely grateful for her invaluable contributions.

The author declares no conflicts of interest regarding the publication of this paper.

Agarwal, R. K. (2023). Emerging Economics, Emergent Currencies: A Look into Dedollarization in Southeast Asia. Modern Economy, 14, 1432-1438. https://doi.org/10.4236/me.2023.1410074