Media: Can the Dollar Maintain Its Global Dominance?

The reserve currency status helps enhance the impact of US sanctions (Associated Press)

Since the 1940s, the US dollar has been the global reserve currency, driving international trade and consolidating the United States' position as an economic superpower.

However, in recent years, some countries have expressed opposition to the long-standing economic dominance of the US dollar.

The BRICS economic alliance, named after its founding members Brazil, Russia, India, China, and South Africa, actively seeks to reduce dependence on the US dollar. China even promotes the renminbi and reaches currency swap agreements with other countries to push for "de-dollarization."

European Central Bank President Christine Lagarde recently pointed out that a "shift" is underway, which will allow the euro to gain global status.

Lagarde said in June that the euro accounts for about 20% of global foreign exchange reserves, while the dollar's "dominance" of 58% is no longer certain.

"History tells us that systems may seem enduring until they no longer exist. The shift in global monetary dominance has happened before. This moment of change is an opportunity for Europe. It is a 'global euro' moment," Lagarde said.

The dollar has also weakened this year, experiencing its worst six-month decline in decades.

Global investors have been reacting to the policy uncertainty of the Trump administration, rising debt, and changes in interest rate expectations - some question its "safe haven" appeal.

Experts say that although it is unlikely to happen, if the United States loses its reserve currency status, the impact would be profound, as the country would lose most of its leverage to influence global trade and enforce sanctions - international trade not directly involving the United States is usually conducted in dollars.

Or, as Trump told reporters earlier this month, "If we lose the world standard dollar, that would be like losing a war."

"We would no longer be the same country."

"The Excessive Privilege"

As the global reserve currency, the dollar supports the monetary system, with central banks relying on it to stabilize economies, manage debts, and implement trade policies.

The dollar has historically been seen as a safe investment, and it remains deeply embedded in the global system, although it has experienced some turbulence recently, but due to its long-term resilience, the dollar is unlikely to be replaced in the short term.

The dollar took this path in the 1930s, when President Franklin Roosevelt concentrated the US gold reserves and pegged the dollar to a fixed supply of gold.

Subsequently, in 1944, the US led the Bretton Woods Agreement, linking international currencies to the dollar, leading to the establishment of the International Monetary Fund (IMF) and the World Bank.

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With much of the world recovering from war, the US held the majority of the global gold reserves, making the dollar the pillar of the post-war financial system. By the 1960s, the dollar gave the US what French former Finance Minister Valéry Giscard d'Estaing called "the excessive privilege."

In 1971, President Richard Nixon severed the last link with the gold standard, known as the "Nixon Shock," allowing the dollar to float freely in the open market. Despite a series of changes, the US economy remained strong, and growth in manufacturing and the information industry supported the dollar's position.

Since the Nixon era, the dollar's dominance has almost only increased, even though countries such as China have surpassed the US in economic growth, population, and manufacturing output. The US continues to exert disproportionate influence through trade agreements and financial sanctions.

Rachel Zimbalist, a part-time senior fellow at the Center for New American Security, told Al Jazeera, "Often, even between emerging markets, when people exchange currencies, such as the Brazilian real and the South African rand, there is often an intermediate transaction with the dollar. Therefore, the extraterritorial power of the US here stems from the fact that other countries and global banks do not want to lose access to the dollar-based financial system."

This also adds weight to the US's ability to impose sanctions.

Zimbalist said, "From a geopolitical perspective, the US having a reserve currency allows it to more flexibly weaponize its currency through financial sanctions and other means."

Because transactions are typically conducted through banks that work with the Federal Reserve, they can still be subject to US sanctions even if the US is not directly involved.

That is why the financial sanctions imposed on Russia after its invasion of Ukraine eventually led to its sovereign debt default. In 2022, the Biden administration's sanctions effectively cut off Russia's trade with the dollar, freezing $300 billion in assets held by the Russian central bank, plunging the economy into paralysis. US-led sanctions caused Russia's GDP to fall by $104 billion.

If the dollar truly lost its domestic status, it would mean higher borrowing costs. Without foreign demand for US debt, interest rates would rise, increasing mortgage and credit card costs. This is because private banks' interest rates are tied to the Federal Reserve's rates.

"This means the US no longer has such a large pool of foreign savings to keep US borrowing costs low. This poses a fundamental threat to the US economic model over the past few decades, which typically used relatively low interest rates to allow consumers, businesses, and governments to finance large amounts of debt at relatively low prices," Pierce said.

"The loss of US dollar dominance means higher interest rates in the US, which will put significant pressure on demand. Mortgage costs will increase significantly," he added.

An Era of Economic Uncertainty

Different from the Nixon era, where US dominance was basically unchallenged, the current global economic connections are more closely integrated.

New powers such as China and India are expanding their global influence, and alternative financial systems, including the rise of cryptocurrencies, are gaining attention. With escalating threats, repeated policy adjustments within the US government could undermine this stability.

Trump's unpredictable attitude on tariffs and global agreements has once again raised doubts about the reliability of the US on the world stage and long-term concerns about the stability of the dollar.

"I think Trump has done more than anyone in modern history to undermine key institutions," said Alex Jakes, a presidential special assistant for economic development at the White House during the Biden administration.

Jakes told Al Jazeera that after Trump's first term, global partners believed the US had returned to the diplomatic stage under Biden.

"When I joined the Biden administration and worked on these issues, there were indeed some disputes and problems with our trade partners, but the international community welcomed our return with sincere negotiations. However, this also left scars and pain from their interactions with the Trump administration," Jakes said.

Nevertheless, Jakes pointed out that regaining this trust may now be more difficult. It's not just because of Trump, but also because of the general pattern of reversing US policies pushed by his administration.

Jakes believes that frequent policy reversals, sudden withdrawals from agreements, and threats to long-term alliances create global instability, making it difficult for other countries to make long-term plans, which could harm the long-term stability of the dollar.

Meanwhile, Trump's recently signed tax reform bill is expected to increase the federal deficit by $3.4 trillion. This has raised concerns about the long-term economic stability of the US, potentially increasing borrowing costs, which would affect global investors, central banks, and ordinary consumers.

In 2023, then-Senator Vance questioned the value of the dollar as a global reserve currency during a conversation with Federal Reserve Chair Jerome Powell.

Vance said, "I think you could say in some way that the reserve currency status is a huge subsidy for American consumers, but a huge tax for American producers."

But since Trump took office and Vance became vice president, the tariffs have placed pressure on American producers rather than the status of the dollar.

There are also concerns about Trump trying to influence the Federal Reserve, which could affect the status of the dollar. Trump has long criticized Powell for not cutting interest rates and threatened to fire him and replace him.

Earlier this month, US Treasury Secretary Scott Bessent told Bloomberg that the White House has started formally looking for a successor to Powell, whose term ends in 2026. Meanwhile, CBS reported that the president asked a group of Republican lawmakers whether they should fire Powell last week.

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However, Trump later told reporters that firing Powell "is highly unlikely."

Michael Pearce, Deputy Chief Economist at Oxford Economics, told Al Jazeera, "Such policies would make investing in US Treasury securities risky, especially for foreign investors, and I think this would make me more worried about the US losing its reserve currency status."

Pearce added, "Tariffs and other policies have already made this American exceptionalism disappear this year. We expect the US to be relatively severely affected compared to the rest of the world. However, in terms of long-term performance, the US is still a relatively vibrant economy."

Competitors for Global Reserve Currency

Some countries are increasingly positioning themselves to play a larger role in the global financial arena, but so far, no country's influence can rival that of the dollar. This means that no currency is likely to replace the dollar as the de facto global reserve currency.

But some have tried to challenge America's influence. In recent years, the BRICS have begun to reduce their reliance on the dollar, which has become a growing concern for Trump.

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At the same time, the European Central Bank is pushing for a more central role for the euro in the global system, but as Lagarde pointed out in her article, "Our currency's move toward greater international status will not happen automatically: it must be fought for."

Although other countries are trying to expand their influence in the global reserve currency, and the dollar has depreciated recently, economists believe that the dollar is unlikely to lose its status as the world's reserve currency. Even if it does, it may take decades to see even a small shift.

Hong Cheng, Head of Fixed Income and Currency Research at Morningstar, told Al Jazeera, "It is definitely too early to worry about the US dollar losing its status as a global reserve currency. Even if it does, it will take several years to achieve."

Pearce also said that the global reserve hierarchy is unlikely to change.

"I don't think a dramatic shift in the US clearly losing its world hegemony is likely to happen. In that sense, I find it hard to see any currency that can compete with the dollar," Pearce said.

Instead, experts say a more realistic future may involve a multipolar currency system, where the dollar shares its status with other major currencies, including the yuan.

"We may be moving towards some kind of multipolar reserve currency environment, where currencies like the yuan will play an additional role. There is no clear alternative currency," said Rachel Zimbalist, a part-time senior fellow at the Center for New American Security.

Even if a shift occurs, it will take decades.

Jakes said, "You need coordination or some alternative system to achieve some managed disengagement, which will also take time."

Although the share of the dollar in global reserves has declined, it has not reached unprecedented lows.

JPMorgan said, "In the early 1990s, the share of the dollar in foreign exchange reserves was lower, so the recent decline to slightly below 60% is not entirely unusual."