US Dollar's Global Dominance: Is it Waning?

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Published on
June 23, 2023

Ever since the concept of currency was conceived, economies have observed a continuous evolution of monetary systems, trends, and dominant currencies. In the contemporary financial world, the US dollar indisputably enjoys the center stage. Nevertheless, recent shifts in the global financial landscape have sparked speculations regarding the potential dethronement of the US dollar. However, despite these conjectures, it's crucial to understand that the US dollar remains a formidable force in the international economic scene.

Delving into the issue, it's evident that the global financial sphere has been gradually moving towards diversifying the use of currencies in transactions and trade. This trend has been amplified by recent developments such as China's exploration of commodity trades in yuan and South American nations like Brazil and Argentina investigating the possibility of a common currency. These trends, coupled with the premise that the demand for the dollar may decrease, have led to some panic and dire predictions about the future of the dollar.

Yet, while these arguments might sound compelling, they are somewhat exaggerated. Indeed, while diversification is becoming a more common theme in the world of global finance, it's a considerable stretch to extrapolate this to the point of predicting the demise of the dollar's dominance. The US dollar continues to hold its ground, despite a slight dip in recent months, and remains relatively high in comparison to the currencies of the countries that the US regularly trades with. It's also important to remember that the US dollar is still the principal currency used in global trade and financial transactions.

Going back a decade, the US dollar has exhibited remarkable resilience, with its value increasing by about 1.4 times since its low in 2011, even after adjusting for inflation. The dollar's upward trajectory has been consistent across both emerging and developed markets, indicating its broad-based gains.

A closer look at the recent history of the dollar reveals that after the financial crisis of 2008-2009, the dollar began its ascent in 2015, spurred on by rising US interest rates. The divergence of monetary policy among major economies played a significant role, with Europe and Japan keeping their policy rates at zero or even negative while the US maintained positive rates. This combination of a stronger recovery and higher returns for dollar-based investments bolstered the dollar's position.

Another critical factor underpinning the strength of the dollar is the sustained demand for it, as evidenced by the continuous growth of foreign holdings of US Treasury securities since 2013. Furthermore, the US has seen significant inflows of foreign direct investment due to its resilient economy. Despite some shifts in global reserve holdings over the past 20 years, the dollar still holds a significant share - about 60% - only slightly down from 67% two decades ago. This stability is partly due to the lack of viable alternatives. For a currency to serve as a reserve currency, it must be freely convertible and backed by deep and liquid bond markets to instill confidence in foreign central banks. The US, with its large, open, and liquid market for Treasury securities, fits this bill like no other.

Looking ahead, we could witness a moderate cyclical decline in the dollar over the next six to 12 months. This potential shift is primarily driven by an expected convergence of interest rates in major economies, as the US Federal Reserve is nearing the end of its rate hiking cycle while other central banks continue to tighten policy. However, in the long-term, the shift towards a multi-currency global economy is plausible, which could bring benefits, particularly to emerging-market countries where the dollar's movements can greatly impact economic growth.

Here is a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis of the US Dollar. Please note that this is hypothetical and subject to change depending on current geopolitical and economic events:


- Reserve currency: The US dollar is the world's primary reserve currency, used in most international transactions.

- Global confidence: The US has a long history of political and economic stability, which inspires confidence in the dollar.

- Strong economy: The US has one of the largest and most diversified economies in the world, which backs the value of the dollar.

- Wide acceptability: The US dollar is accepted nearly everywhere in the world, which increases its demand and strengthens its value.


- High national debt: The US has a high national debt level, which could potentially impact the value of the dollar.

- Dependence on global oil trade: Much of the dollar's value comes from oil trades, which are done in dollars. Shifts in the energy sector could impact this.

- Monetary policy: Quantitative easing and other monetary policies can lead to inflation and decrease the value of the dollar.

- Political uncertainty: Political instability or policy changes can have a significant impact on the value of the dollar.


- Digital currency: The US could leverage its economic power to lead in the development and adoption of digital currencies.

- Continued innovation: The US is a global leader in technological innovation and this could help maintain the dollar's dominance.

- Increased trade: Expanding trade relations with emerging economies could increase the use and value of the dollar.


- Rising economies: The increasing influence of emerging economies, such as China and India, could challenge the dominance of the dollar.

- Digital currencies: Cryptocurrencies and potential digital currencies from other central banks could threaten the dollar's status.

- De-dollarization: Some countries are trying to shift away from the US dollar in international trade, which could reduce its dominance.

- Changes in global reserve status: If other currencies gain reserve status, this could weaken the dollar's standing.

In conclusion, the US dollar's dominance in the global financial market is here to stay for the foreseeable future.

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