De-Dollarization by Monetary Function: A Framework and a Functional Index

Aims: This study aims to reconceptualize de-dollarization by moving beyond aggregate currency shares and examining the distinct monetary functions performed by the US dollar, in order to clarify the structural limits and risks associated with substitution away from the dollar. Study Design: This is a theoretical and analytical study grounded in international monetary economics, macro-financial stability theory, and international political economy. Methodology: The paper develops a formal analytical framework that decomposes international currency use into four functionally distinct roles: unit of account, medium of exchange, store of value, and financial anchoring. De-dollarization is modeled as functional bypass rather than generalized substitution, with feasibility constrained by balance-sheet risk, safe-asset scarcity, settlement efficiency, and sudden-stop dynamics. A Functional De-Dollarization Index (FDI) is introduced to summarize effective monetary sovereignty net of macro-financial stability costs. Results: The analysis shows that substitution away from the US dollar is relatively feasible in pricing and payment functions but sharply constrained in store-of-value and financial-anchoring roles, particularly in financially shallow economies. Premature bypass in safety- and finance-critical functions generates nonlinear instability through currency mismatch, financing contractions, and settlement fragmentation. As a result, partial dollarization emerges as a second-best equilibrium that stabilizes output and capital flows under global risk shocks. Conclusion: This paper reconceptualizes de-dollarization not as hegemonic decline, but as a function-specific reallocation of monetary roles shaped by infrastructure scarcity and constrained by macro-financial risk. International monetary power arises not from currency share dominance per se, but from the ability to provide stability-critical monetary infrastructure under stress. At present, the currency that can comprehensively fulfill this role is, in practice, limited to the US dollar.