Long Read: The beginning of the end for the US dollar’s global dominance. (2024)

FAQs

What is the dominance of the US dollar? ›

The dollar's dominance tracks with the ascent of the US as a global superpower following World War II. Since then, investors have relied on dollars — and assets denominated in them, such as US Treasuries — to be among the best places to stash wealth, in both good times and in bad ones.

Hirt: There are three primary reasons the U.S. dollar continues to be the reserve currency of choice globally. One is that the U.S. is a traditionally strong sovereign nation, backed by robust, persistent economic growth. Another is the democratic nature of the U.S. government and its institutions.

In sum, the international monetary and reserve system continues to evolve. The patterns we highlighted earlier—very gradual movement away from dollar dominance, and a rising role for the nontraditional currencies of small, open, well-managed economies, enabled by new digital trading technologies—remain intact.

Dollar Dominance: A Brief History

In 1944, the U.S. dollar became the world's reserve currency under the Bretton Woods Agreement. Over the first half of the century, the U.S. ran budget surpluses while increasing trade and economic ties with war-torn countries, expanding its influence as the world's store of value.

Major commodities such as oil are primarily bought and sold using U.S. dollars, and some major economies, including Saudi Arabia, still peg their currencies to the dollar. Factors that contribute to the dollar's dominance include its stable value, the size of the U.S. economy, and the United States' geopolitical heft.

The dollar's value comes from the US' position as a critical global economic power and the country's political and economic stability. While it may hold less value than such currencies as the Swiss franc or the British pound, the dollar's global use makes it a more commercially viable currency.

China has pursued de-dollarization — efforts to reduce global reliance on the U.S. dollar for trade and financial transactions — through partnerships with non-Western regional and multilateral groups, such as the Shanghai Cooperation Organization (SCO) and BRICS, by advocating for the use of local currencies in ...

And in times of international stress, investors flock to U.S. Treasuries as a way to stabilize the value of their assets. "I do not expect to see the U.S. dollar lose its status as the world's reserve currency anytime soon, nor even see a significant decline in its primacy in trade and finance," Waller said.

Prior to 1971, the US dollar was backed by gold. Today, the dollar is backed by 2 things: the government's ability to generate revenues (via debt or taxes), and its authority to compel economic participants to transact in dollars.

Demand for the U.S. dollar is also high because it is the world's most prevalent reserve currency; many nations hold large reserves of the dollar. For these reasons, among many others, the likelihood of the U.S. dollar collapsing is zero.

Which countries are leaving the US dollar? ›

In late March 2023, China and Brazil finalized an agreement to conduct trade using their respective currencies. In December of 2023, Russia and China expressed 'their intent to abandon the US dollar in their bilateral transactions'.

For the U.S., it would likely mean less access to capital, higher borrowing costs and lower stock market values, among other effects. Having the world's reserve currency has allowed the U.S. to run large deficits in terms of both international trade and government spending.

The highest-valued currency in the world is the Kuwaiti Dinar (KWD). Since it was first introduced in 1960, the Kuwaiti dinar has consistently ranked as the world's most valuable currency. Kuwait's economic stability, driven by its oil reserves and tax-free system, contributes to the high demand for its currency.

Continued Faith in the U.S. Dollar

Even with de-dollarization, the U.S. dollar remains the world's currency reserve. The status is due primarily to the fact that countries accumulated so much of it and that it was still the most stable and liquid form of exchange.

The dollar's hegemony rests on the economic, military, and international political power of the US. There have been two eras of dollar hegemony which were characterized by different models. Dollar hegemony 1.0 corresponded to the Bretton Woods era (1946-1971).

The monetary policy of the United States is conducted by the Federal Reserve System, which acts as the nation's central bank.

US dollar (USD)

It is the number one most traded currency globally, accounting for a daily average volume of US$2.9 trillion.

The Department of the Treasury is the lead agency setting U.S. international economic policy, including policies regarding the dollar. The value of the dollar is determined in foreign exchange markets, and neither the U.S. Treasury nor the Federal Reserve targets a level for the exchange rate.