U.S. Dollar’s Global Dominance on the Decline


In recent years, more countries have been calling for a move away from relying on the U.S. dollar for international trade.

This shift is due to several factors, including concerns about the stability of the U.S. economy and the potential for the dollar to lose value over time.

According to the International Monetary Fund (IMF), one possibility for the future of currency in a digital world is for central banks to issue their own digital tokens.

However, this solution would require careful consideration of choices and trade-offs, as well as a high level of sophisticated coordination among central banks.

The move away from the U.S. dollar has been driven by a handful of countries, including Brazil, China, and Russia, which have been working to establish their own currencies as alternatives to the dollar.

Other countries, including Iran and Venezuela, have also been exploring alternatives to the dollar due to harsh U.S. sanctions.

The shift away from the old greenback could have significant implications for the global economy, as the dollar has long been the dominant currency for international trade and finance.

By the Numbers

According to the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) survey, the share of U.S. dollar reserves held by central banks fell to 59% during the fourth quarter of 2020, which is its lowest level in 25 years.

This represents a 12% drop from 71% since the euro was launched in 1999.

However, in the second quarter of 2022, the U.S. dollar’s share of currency reserves reported to the IMF rose to 59.5%, from 58.8% in the first quarter.

It is important to note that the share of the U.S. dollar in global forex reserves can fluctuate due to various factors, such as exchange rate movements and central bank buying and selling decisions.

While the share of the U.S. dollar in global forex reserves has fallen in recent years, it still remains the dominant currency in international trade and finance – comprising a staggering 96% of all such transactions between 2009 and 2019.

Big Oil Plays a Major Role

For decades, oil and other commodities have been internationally priced and traded in U.S. dollars.

This practice has become so entrenched that it is often referred to as the “petrodollar system,” which began to take shape in the 1970s, following the collapse of the Bretton Woods system of fixed exchange rates.

At that time, the U.S. dollar was still backed by gold, but a surge in oil prices led to inflation and a weakening of the U.S. economy.

To shore up the value of the dollar, the U.S. government negotiated a deal with Saudi Arabia, whereby the country would only sell oil in U.S. dollars in exchange for U.S. military protection.

This agreement paved the way for other countries to follow suit, effectively cementing the U.S. dollar’s dominance in the global oil market.

Economic Factors in Trading

Perhaps in part because of the sheer size of the U.S. economy, the American dollar has continued to be used in commodities trading as the world’s reserve currency – meaning that it is used to settle international transactions and held in reserve by many central banks.

This gives the U.S. dollar a level of stability and liquidity that other currencies cannot match.

Another factor is the role of the U.S. in global financial markets – the U.S. is home to some of the world’s largest financial institutions.

This has led to the development of a vast network of financial infrastructure that continues to support the use of the U.S. dollar in commodity trading.

Additionally, there is the issue of trust – the U.S. government has a long-standing reputation for fiscal responsibility and stability, which has helped bolster market participants’ confidence in the greenback.

Despite its continued prevalence, the percentage of global transactions conducted in U.S. Dollars has decreased over time.

While people worldwide still view American currency as a valuable tool for exchange, the latest data reveals a decline in its usage – the U.S. dollar’s share of global transactions fell to 88%, as of April 2022.

Several Reasons Behind the Downward Trend

This shift away from the U.S. dollar has been driven by a combination of economic and political factors, as well as concerns about the stability and reliability of the greenback as the dominant global currency.

Concerns about the stability of the U.S. economy and the potential risks associated with fluctuations in the value of the dollar have grown in recent years.

Geopolitical risks and economic dynamics have also accelerated the trend to move away from the U.S. dollar.

Another reason for the shift away from the U.S. dollar is a desire to reduce dependence on a single currency for global transactions.

By diversifying their currency reserves and exploring alternative options, countries can better protect themselves from potential economic shocks and maintain greater control over their own financial systems.

Moreover, countries moving away from using the dollar as the middleman in bilateral trade can help them move up the value chain.

This is because the use of the U.S. dollar in international trade can limit the ability of countries to develop their own financial systems and industries.

U.S. Dominates Global Economy

Another key reason behind this trend is the sheer size and influence of the American economy.

Since the United States is the largest economy in the world, its dollar has long been the dominant currency for international trade and finance.

However, this dominance has come at a cost, as other countries have become increasingly reliant on the greenback, and by default, the U.S. financial system.

This has made them vulnerable to fluctuations in the value of the U.S. dollar, as well as to the policies of the U.S. government and the Federal Reserve (Fed).

Another factor driving the move away from the U.S. dollar is the increasing use of other currencies for international trade.

The euro, for example, has become an important currency for trade between European countries, and the Chinese yuan is becoming more widely used in Asia.

This has given rise to a more multipolar global currency system, where multiple currencies are used for different purposes and in different regions.

Political Factors in Play

In addition to all the economic factors, there are also political factors driving the shift away from the U.S. dollar.

Some countries are concerned about the use of the U.S. dollar as a tool of American foreign policy and are seeking to reduce their dependence on the U.S. financial system as a way of protecting their own interests.

This is particularly true for countries that have had strained relations with the United States in recent years, like Russia, Iran, and Venezuela.

One of the most high-profile examples of this trend is the ongoing efforts by China to promote the use of the yuan as a global currency.

China is the world’s second-largest economy and has been working to increase the international use of its currency as part of its broader efforts to challenge the dominance of the U.S. in the global economy.

China has established several initiatives aimed at promoting the use of the yuan, such as the Belt and Road Initiative, which aims to increase infrastructure investment and trade between China and other countries.

There are also concerns among some countries about the stability and reliability of the U.S. dollar as the dominant global currency.

The U.S. has a large and growing national debt, and some worry that this could lead to additional inflation and a decline in the value of the dollar.

In addition, there is a risk that the U.S. could use its control over the global financial system to pursue its own international political interests, potentially at the expense of other countries.

What are the Alternatives?

As more countries seek alternatives to the U.S. dollar in international trade, several options have emerged.

One possibility is the use of digital tokens issued by central banks, which could provide a more stable and secure option for global transactions.

Another option is the use of local currencies in bilateral trade deals and transactions, reducing dependence on the U.S. dollar as a middleman.

Some countries are also exploring the use of different currencies for their reserves to reduce their dependence on the U.S. financial system.

Russia and China have been particularly active in this area, seeking to reduce America’s dominance over the global financial system.

In addition, some countries are also exploring the use of other non-oil commodities as a means of exchange in international trade.

Snapshot: Issues with Ditching the U.S. Dollar

While this shift is still in its early stages, there are several potential benefits and drawbacks associated with the move away from relying on the greenback as the dominant currency for international trade.

Possible Benefits:

  • Increased sovereignty: One of the primary benefits of moving away from the U.S. dollar is that it can increase a country’s sovereignty over its own monetary policy. When countries rely on the U.S. dollar for international trade, they are subject to U.S. monetary policy decisions, which may not always align with their own economic goals.
  • Reduced currency risks: Another potential benefit of moving away from the U.S. dollar is that it can reduce currency risks. If a country’s currency is pegged to the U.S. dollar, it is subject to fluctuations in the value of the dollar, which can be unpredictable and potentially harmful to the country’s economy.
  • Increased trade with other countries: By using other currencies, countries may be able to increase trade with other countries that have traditionally been excluded from the U.S. dollar-dominated system. This could lead to increased economic growth and development for these countries.
  • Increased competition: Finally, moving away from the U.S. dollar could increase competition in the international currency market, potentially leading to lower transaction costs and increased efficiency.

Potential Drawbacks:

  • Economic instability: One potential drawback of moving away from the U.S. dollar is that it could lead to economic instability. The U.S. dollar is currently the most widely used currency for international trade, and any major shift away from it could lead to uncertainty and instability in the global economy.
  • Reduced liquidity: Another potential drawback of moving away from the U.S. dollar is that it could reduce the liquidity of the international currency market. The U.S. dollar is currently the most widely traded currency in the world, and any major shift away from it could lead to reduced trading volume and liquidity.
  • Increased transaction costs: Moving away from the U.S. dollar could also lead to increased transaction costs, as countries would need to establish new currency exchange mechanisms and infrastructure to support the use of other currencies for international trade.
  • Political tensions: Finally, there is the potential for increased political tensions between countries if they choose to move away from the U.S. dollar. The U.S. dollar has traditionally been seen as a symbol of U.S. economic and political power, and any major shift away from it could be seen as a challenge to that power.

Even though the U.S. dollar has long played an outsized role in global markets, central banks aren’t holding the greenback in their reserves to the extent that they once did.

As the world becomes increasingly digital, the future of currency is likely to be shaped by a range of factors, including technological innovation, geopolitical shifts, and changing economic conditions.

As more countries seek to reduce their dependence on the dollar and explore new options, the future of the American dollar as the dominant currency in global trade remains uncertain.

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The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.

“About

Chris Lean

Chris is a Chartered Financial Planner who writes blogs and articles to simplify and explain some of the financial issues that affect UK expats. Subjects include; hot topics, regulation and the ever-changing world of finance.

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