Since the 1940s, the US dollar has maintained its position as the global reserve currency, which has played a significant role in international trade and strengthened the United States’ status as an economic superpower.
However, in recent years, various countries have spoken out against the dominance of the US dollar in the global economy.
The BRICS economic bloc, comprised of Brazil, Russia, India, China, and South Africa, has actively worked to minimize its dependence on the dollar.
China has taken significant steps toward “de-dollarisation” by promoting the yuan and establishing currency swap agreements with other nations.
At the same time, Christine Lagarde, president of the European Central Bank, has remarked on a “shift” in the financial landscape that could elevate the euro’s status on the world stage.
In June, she pointed out that the euro now constitutes about 20 percent of global foreign exchange reserves, while the US dollar holds a commanding 58 percent.
Lagarde emphasized that the dollar’s dominance is “no longer certain,” drawing attention to historical precedents where established currency regimes faced rapid shifts.
“History teaches us that regimes seem enduring – until they are not,” she stated, stressing the opportunity for Europe to position the euro for greater international prominence.
This recent landscape has seen the dollar weaken, reflecting its sharpest decline in decades over a six-month period.
Global investors are increasingly concerned about the uncertainty of US policies under the administration of President Donald Trump, coupled with rising national debt and evolving interest rate expectations that raise questions about the dollar’s appeal as a “safe-haven” asset.
Experts indicate that if the US were to lose its reserve currency status, it could lead to profound consequences, eroding much of its capacity to influence global trade and enforce sanctions.
Transactions in international trade, even when not directly involving the US, often go through the dollar.
President Trump has expressed the gravity of the situation, noting, “If we lost the world standard dollar, that would be like losing a war.
We would not be the same country.”
As the global reserve currency, the US dollar undergirds a monetary system that allows central banks worldwide to stabilize their economies, manage national debt, and enact trade policies.
Historically viewed as a reliable investment, the dollar’s entrenched position in the global financial ecosystem has made it resilient despite contemporary challenges.
The dollar’s prominence began during the 1930s when then-President Franklin D. Roosevelt centralized US gold reserves and linked the dollar to a fixed gold supply.
This trajectory accelerated in 1944 with the Bretton Woods Agreement, which established the dollar as the anchor for international currencies and led to the formation of the International Monetary Fund (IMF) and the World Bank.
After World War II, as much of the world was rebuilding, the US, possessing the majority of global gold reserves, saw the dollar solidify its role in the emerging financial system.
By the 1960s, the dollar had granted the US what former French Minister of Finance Valéry Giscard d’Estaing referred to as an “exorbitant privilege.”
In 1971, US President Richard Nixon ended the last connections to the gold standard through the “Nixon shock,” which permitted the dollar to trade freely in the open market.
Despite substantial economic transformations during subsequent decades, including shifts in global power with nations like China witnessing rapid economic growth, the dollar has continued to prevail.
The US has wielded a disproportionate influence over the global economy through its trade agreements and ability to issue financial sanctions.
Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security, explains, “Even among emerging markets, when converting currencies like the Brazilian real and the South African rand, transactions often convert to US dollars, showcasing the extraterritorial power the US holds.
It shows that global banks generally do not want to lose access to the US dollar system.”
This power is amplified when the US imposes sanctions.
“The ability for the US to hold a reserve currency provides it with greater flexibility to weaponize its currency through sanctions and other measures,” Ziemba added.
Due to the necessity for transactions to pass through banks that interact with the US Federal Reserve, these transactions can become subject to US sanctions, even if the US is not directly involved.
A prime example is the financial sanctions imposed on Russia following its invasion of Ukraine, which led to a substantial default on Moscow’s sovereign debt.
In 2022, sanctions administered under President Biden resulted in Russia’s exclusion from dollar-based trade, with $300 billion in assets frozen, severely crippling its economy and leading to a $104 billion decline in GDP.
Should the dollar lose its reserve status, it would result in higher domestic borrowing costs for the US.
Without foreign demand for US debt, interest rates would inevitably climb, elevating costs related to mortgages and credit cards, as private banks tie their rates to those offered by the Federal Reserve.
Economic expert Pearce noted, “The US would no longer have that extensive pool of foreign savings to rely upon, which could fundamentally threaten the US economic model established over the past few decades – a model that has benefitted from relatively low interest rates.”
He added, “A loss of dollar dominance for the US would mean higher interest rates, causing significant pressure on consumer demand, and mortgages would become considerably more expensive.”
We find ourselves in a new era filled with economic uncertainty, vastly different from Nixon’s time of relatively unquestioned US dominance.
The contemporary global economy is now far more interconnected.
Emerging powers, particularly China and India, have made strides in strengthening their global economic reach, paralleling the resurgence of alternative financial systems, including cryptocurrencies.
With the erratic policy shifts from one US administration to the next, there is growing concern regarding the stability of the dollar amidst these rising challenges.
President Trump’s unpredictable approach to tariffs and global agreements has contributed to skepticism surrounding US reliability on the international stage.
Alex Jacquez, a former special assistant to the president for economic development in Biden’s White House, asserted, “I think Trump has done more than anybody in modern history to undermine key institutions.”
He noted that despite a return to diplomacy under President Biden, a sense of distrust remains, influenced by the Trump administration’s policy stance.
Regaining that trust in foreign relations may become a complex task, not solely due to Trump but as a result of broader patterns of policy reversals instigated during his presidency.
Jacquez highlighted that these abrupt policy shifts have contributed to instability, hampering the ability of other nations to strategize for the long term, which could further jeopardize the dollar’s status.
Furthermore, concerns have emerged relating to President Trump’s tax legislation, which is projected to add over $3.4 trillion to the federal deficit.
Such increments exacerbate fears about long-term economic stability and potentially heighten borrowing costs that may adversely affect both global investors and everyday Americans.
In a notable exchange, then-Senator JD Vance raised the topic concerning the dollar’s status as a global reserve currency while speaking with Federal Reserve Chairman Jerome Powell.
He suggested it could be argued that the reserve currency status serves as a substantial subsidy to American consumers but simultaneously imposes a tax on American producers.
However, the more pressing matter continues to be the impact of Trump’s tariffs on US manufacturers rather than the status of the dollar itself.
Further complicating the issue are apprehensions regarding Trump’s influence over the Federal Reserve, which has the potential to sway the dollar’s standing.
As President Trump has been critical of Powell for fixation on interest rates, rumors of potentially firing or replacing Powell have arisen.
Just last week, US Secretary of the Treasury Scott Bessent informed Bloomberg that the administration has initiated the formal search for a successor to Powell, as his term wraps up in 2026.
However, Trump later indicated that firing Powell is “highly unlikely.”
“Such policies could result in foreign investors perceiving US treasuries as risky, which is a significant concern for maintaining reserve currency status,” stated Michael Pearce, deputy chief economist at Oxford Economics.
He further warned that “tariffs and other policies strip away the notion of US exceptionalism, at least for this year, as we anticipate a noticeable impact on tariffs on the US economy.”
Experts suggest that while emerging nations are increasingly seeking to expand their global financial roles, none have yet approached the dollar’s sheer influence.
This reality casts doubt on the possibility of any currency usurping the dollar as the global reserve currency anytime soon.
Both Xi’s China and emerging economies are voiced concerns regarding the increasing traction of alternative financial frameworks, leading to rising anxieties for Trump.
In parallel, the European Central Bank is actively advocating for the euro to take a more central position within the global financial system.
However, as Lagarde has observed, any transition toward international acclaim for the euro requires more than mere intentions; it necessitates demonstrable effort.
Economists generally remain skeptical about the likelihood of the dollar forfeiting its status as the world’s reserve currency.
Should such a change occur, they suggest it could take decades for even minor adjustments to materialize.
“It’s certainly premature to worry about the dollar’s reserve status diminishing,” remarked Hong Cheng, head of fixed income and currency research at Morningstar.
Pearce echoed this sentiment, stating, “Dramatic changes leading to the US losing its leading position remains unlikely.
I struggle to envision a viable contender emerging to rival the dollar’s supremacy.”
Instead, what may come about is a more multipolar currency system where the dollar coexists with other major currencies, particularly the Chinese renminbi.
“This suggests the potential for a multipolar reserve currency framework, providing space for the renminbi alongside the dollar,” noted Ziemba.
Even if a transition occurs, the process is expected to be gradual and drawn out.
“A managed unwinding—produced through coordinated choices or an alternative system emerging—will take substantial time,” Jacquez remarked.
While the dollar’s share of global reserves has dipped modestly, it remains above levels seen in previous decades.
According to JPMorgan Chase, the dollar’s holdings in foreign exchange reserves were even lower during the early 1990s, indicating that the recent decrease to just under 60 percent is not unprecedented.
In emerging markets, the same proportion of US dollar reserves observed in 1995 endures.
Following recent sell-offs, including movements by China in April, analysts predict that impacts on the dollar’s dominance will be limited.
Countries typically hold US Treasuries as liquid assets, contributing to their own currency stability, meaning that jeopardizing the dollar’s status could adversely impact their own interests.
With over 30 percent of foreign Treasury holdings maturing within the next two years, major international investors are likely to allow these assets to reach maturity instead of opting for significant divestiture.
Consequently, it appears that the US dollar will remain a central player in the global economy for the foreseeable future.
“I don’t envision a singular currency overtaking the dollar, and should any shift occur, it would likely transpire over many years,” Cheng assessed.
“In the context of 20 to 50 years, a transition would unfold gradually as we continue navigating these complex economic waters.”
image source from：aljazeera
