De-Dollarization Takes More Than Currency Restrictions

Since the end of WW2, the global financial system has been built around the US dollar. The currency is widely used to settle international trade, even when neither party is American or a close American ally. This has provided a common basis for international trade and contracts, as well as proving a valuable tool for the US economy and diplomacy.

Some economies are “dollarized,” meaning residents or businesses use US dollars alongside, or instead of, the domestic currency. This can occur officially, when a country adopts the dollar as legal tender, or informally, when people hold a significant share of their deposits in dollars. A country can also peg its own currency to the dollar, although a peg alone does not constitute dollarization.

Such a dollarized economy can initially benefit from this trend, as it can provide a more stable currency for savings and investment. But it can also make the country’s economy more vulnerable to external shocks and currency exchange rate fluctuations.

In a recent study, researchers at the Université Grenoble Alpes (France) and the Université Saint Joseph de Beyrouth (Lebanon) have analyzed how macroeconomic fundamentals and IMF programs shape dollarization and de-dollarization trends.

They found that currency stabilization, IMF-supported programs, and deeper domestic bond markets were associated with a de-dollarization transition. They also found that different domestic measures differ markedly in their associations with deposit dollarization.

They published their findings in International Review of Economics & Finance, under the title “Financial de-dollarization dynamics: The role of macroeconomic fundamentals and IMF programs”.

Why Do Countries Dollarize?

Countries may seek to maintain the purchasing power and role of their national currency as a way to retain greater control over their economies and policies.

“While dollarization is usually considered as an indicator of the openness of an economy, it also reflects the failure of a country to protect its currency and this represents the starting point of political debates on sovereignty.”

Dollarization can weaken monetary policy and constrain a central bank’s ability to provide foreign-currency liquidity during a crisis. The extent of those constraints depends on how widely the dollar is used and whether the country retains its own currency.

Still, in practice, many countries dollarize for a variety of reasons:

• A high inflationary context with an unstable real exchange rate can lead locals to substitute their holdings in national currency for US dollars, to preserve their purchasing power.
• Implicit guarantees or bailouts, and incomplete prudential regulation, can favor the use of the dollar over the domestic currency.
• Political pressure from interest groups: outward-oriented sectors (exporters, banks, and importers) favor the dollar to mitigate exchange-rate risks, while domestically oriented sectors may lose the adjustment mechanism provided by the local currency.
• Strategic choices: greater openness and reliance on external finance can make dollarization an attractive signal of monetary discipline, increasing external credibility at the price of some internal sovereignty.

So overall, dollarization is driven by multiple factors: volatility in the real exchange rate, instability in domestic capital markets, weak macroeconomic credibility, and structural financial underdevelopment.

Besides economic factors, dollarization also reflects the peripheral position of developing countries within the global monetary hierarchy. The researchers note that the dollar’s role also reflects its integration into global trade, finance, and external debt.

Dollarization has persisted in several emerging economies, including countries in Latin America, Eastern Europe, and Asia, where inflation and exchange-rate instability have encouraged residents to hold foreign-currency deposits.

Analyzing Dollarization And De-Dollarization

An Overview Of De-Dollarization

In this study, the researchers used a sample of 12 emerging economies with significant deposit dollarization over 1980–2023: Chile, Peru, Bolivia, Mexico, Paraguay, Uruguay, Poland, Azerbaijan, Kazakhstan, Türkiye, Pakistan, and Egypt.

This sample combines highly dollarized economies (e.g., Bolivia, Peru, Uruguay) with moderately dollarized ones (e.g., Mexico, Poland, Pakistan), which provides variation in both dollarization outcomes and policy choices.

The researchers distinguish between two types of dollarization:

• Partial and de facto dollarization, the most common pattern, where de-dollarization remains possible under such regimes, as demonstrated in several cases.
• By contrast, full and de jure dollarization (legal/official) is difficult to reverse, since it requires recreating a domestic currency and building confidence in it.

The paper discusses a definition of sustained de-dollarization in which foreign-currency deposits or loans fall from above 40% to 20% or less and remain at that lower level for at least five consecutive years. The study’s main empirical analysis examines changes in deposit dollarization across the sample.

In any case, de-dollarization processes are often lengthy, politically contentious, and institutionally complex.

De-Dollarization Policies

The first set of de-dollarization policies is about macroeconomic stabilization and credibility building.

In the cases discussed by the researchers, lasting de-dollarization often involved stabilizing inflation and avoiding rigid exchange-rate pegs. Greater central bank independence and fiscal discipline also enhanced the credibility of monetary policy.

Another set of de-dollarization policies involves microeconomic and prudential measures. These targeted regulations can take many forms, such as higher reserve requirements on dollar deposits and restrictions on foreign-currency lending to people or companies without dollar income.

The researchers also highlight market development and institutional deepening as ways to sustain de-dollarization. Issuing local-currency bonds and promoting domestic currency-denominated instruments for institutional investors can provide alternatives to foreign-currency savings and help reduce external vulnerability.

In the cases discussed, the researchers describe a cycle in which reduced dollarization expanded monetary policy autonomy and reinforced confidence in the domestic currency.

Best De-Dollarization Policies

Dollarization As An Answer To Monetary Issues

The study describes monetary substitution as a persistent phenomenon, with monetary issues often taking many years to resolve.

“The countries in the sample spent nearly 45% of the observed years under agreement with the IMF, thus suggesting the long duration of their macroeconomic imbalances and financing needs.”

The countries in the sample experienced average inflation of 12.47%, with many individual cases or periods seeing much higher levels. High exchange rate volatility was also characteristic of the sample.

The study also examined the association between IMF programs and deposit dollarization.

IMF Programs

In the study’s descriptive analysis, average deposit dollarization rose from 64% in the year before an IMF program to 65% in the program year. It then fell to 63%, 61%, and 60% in the following three years. Outcomes varied across countries, and the figures alone do not establish that IMF programs caused the decline.

Some economies experienced rapid declines in dollarization after the adoption of IMF programs, while others exhibited more persistent dollarization despite the programs.

The researchers also used statistical methods to account for differences between countries and the factors associated with entering an IMF program. Their analysis found an association between IMF programs and lower deposit dollarization.

Administrative Vs Market Rules

Regarding the possible measures taken by a given country, the researchers considered two categories:

• Administrative rules: acts of the authorities that directly constrain or price foreign-currency intermediation or mandate the use of the local currency.
• Market rules: market conditions or incentives under which agents voluntarily hold local-currency assets.

Administrative measures as a group did not show a statistically significant association with lower deposit dollarization. However, restrictions and reserve requirements on foreign-currency lending, as well as requirements to use local currency in domestic transactions, were associated with lower dollarization at certain longer horizons.

In contrast, market-oriented measures, as a group, showed a stronger association with lower deposit dollarization.

When investigating in further detail, the researchers found that the issuance of local-currency debt securities on the markets was consistently associated with lower deposit dollarization.

Investors Takeaways

For international investors interested in emerging markets, understanding macroeconomic trends like dollarization and de-dollarization can be as important as a good understanding of a specific company or sector.

Successful de-dollarization can be a sign of improving conditions, as it may reflect greater confidence in the local currency. The study found that deeper domestic bond markets were associated with lower deposit dollarization.

Administrative measures can support de-dollarization, but the study suggests that their associations with deposit dollarization vary by policy. Building confidence in the local currency and developing attractive domestic financial instruments may also help sustain the transition.

However, foreign investors need to remember that reduced domestic dollarization does not automatically produce attractive investment returns.

So understanding the (de)dollarization process should be viewed as a useful tool, but not the sole analysis filter. Exchange-rate movements, inflation, sovereign risk, and bond valuations still determine the investment outcomes.

Investing In International Finance

BlackRock

While direct exposure to emerging markets is always a possible option, it carries significant risks, as they tend to be more volatile. In addition, currency exchange rate fluctuations can impact an individual investment’s profitability when measured in US dollars, irrespective of its performance in local currency.

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The ETF provides exposure to sovereign debt from emerging markets. As of October 16, 2026, its largest geographic exposures included China, India, Mexico, Malaysia, and Brazil.

Source: BlackRock

BlackRock is an indirect way to invest in the company providing access to products such as LEMB. Its business also spans asset management, technology, and private markets, so its financial performance depends on much more than demand for emerging-market bond funds.

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Study Referenced

Salim Chahine, et al. Financial de-dollarization dynamics: The role of macroeconomic fundamentals and IMF programs. International Review of Economics & Finance. 10.1016/j.iref.2026.105991