Dollar has been the backbone of international trade, investment, and reserve holdings.
The global financial landscape has long been anchored by the U.S. dollar, a symbol of economic stability and international trust. However, recent analyses suggest that the dollar’s preeminence faces challenges that originate not from external competition, such as the growing aspirations of the BRICS bloc, but from internal factors tied to U.S. policy decisions. The narrative surrounding the BRICS countries—Brazil, Russia, India, China, and South Africa—and their efforts to establish an alternative to the dollar has gained significant traction in global economic discussions. Yet, experts argue that this competition is less of a direct threat to the dollar’s dominance than the ripple effects of overreach in U.S. monetary and foreign policy.
For decades, It owes its primacy to factors like the size of the U.S. economy, the liquidity of its financial markets, and the perceived stability of its political system. These attributes have fostered confidence among nations, corporations, and individuals to rely on the US currency for cross-border transactions and as a store of value. However, in a rapidly evolving world economy, the US currency supremacy cannot be taken for granted. The BRICS nations, for instance, have been vocal about their desire to reduce dependence on the , arguing that its dominance gives the U.S. undue influence over global financial systems. They have initiated measures such as trade agreements in local currencies and even the creation of a BRICS reserve fund to counterbalance the sway.
While these moves have captured headlines, their actual impact remains limited. The dollar still accounts for nearly 60% of global foreign exchange reserves and over 80% of global trade financing. The euro, yen, and yuan trail far behind in their roles as global currencies. The infrastructure and trust underpinning the US currency have been built over decades, making it difficult for any alternative to emerge quickly. Analysts note that while the BRICS countries may have regional influence, they lack the cohesive political and economic structures required to create a unified and credible rival to the dollar.
Instead, the greater threat to the US currency arises from within the United States itself. A key concern is the increasing use of the US currency as a tool of economic statecraft, particularly through sanctions. The U.S. government has frequently leveraged the US currency dominance to enforce foreign policy objectives, freezing assets and restricting access to financial systems for countries that fall afoul of its interests. While this approach has been effective in the short term, it has prompted many nations to seek alternatives to reduce their vulnerability to such measures. Countries like Russia and China have accelerated efforts to establish bilateral trade arrangements in their own currencies, bypassing the dollar. This trend underscores a growing desire among nations to protect their sovereignty and reduce exposure to U.S. policy decisions.
Another internal factor eroding confidence in it is the U.S. debt trajectory. With national debt surpassing $33 trillion and fiscal deficits remaining high, questions about the long-term sustainability of U.S. fiscal policy are intensifying. While the dollar has benefited from its status as a “safe haven” asset during periods of global uncertainty, persistent fiscal mismanagement could chip away at that trust. Investors and foreign governments holding U.S. Treasury securities may start questioning the reliability of the dollar as a store of value if concerns about debt repayment capabilities escalate.
Inflation, though currently moderating after a period of post-pandemic turbulence, also plays a role in the perception of the stability. Rapid increases in money supply during the pandemic, combined with subsequent efforts by the Federal Reserve to tighten monetary policy, have raised concerns about the balance between economic growth and inflation control. If inflationary pressures resurge or if monetary tightening leads to economic stagnation, the dollar’s appeal could face headwinds.
Geopolitical factors further complicate the picture. As global power dynamics shift, the U.S. faces challenges in maintaining its influence over international institutions and trade systems. Emerging economies are increasingly seeking to assert their independence, and alliances such as the BRICS bloc are leveraging these shifts to advocate for a multipolar world order. While these aspirations are unlikely to dethrone the dollar in the near term, they signify a gradual erosion of the unipolar framework that has underpinned dollar dominance.
Technological advancements and the rise of digital currencies add another layer of complexity. Central bank digital currencies (CBDCs), particularly China’s digital yuan, are being viewed as potential disruptors to the existing global financial order. Although these technologies are still in their infancy, they hold the potential to bypass traditional financial systems dominated by the dollar. If widely adopted, CBDCs could redefine how cross-border transactions are conducted, challenging the dollar’s hegemony indirectly.
