Will the US dollar maintain its global dominance?
The US administration’s aggressive tariff policies, wavering military support for allies, skirmishes with the rule of law and constitution, and threats to the independence of the Federal Reserve (Fed) have sent shockwaves through financial markets. Together, these developments are raising questions: Is the dollar still a safe-haven currency? Are we witnessing the start of a long-term shift that could threaten its global dominance?
Historical shifts in currency dominance
Historically, the US dollar has not always held this dominant position. The pound sterling was the primary reserve currency during the 19th and early 20th centuries. This was driven by the British Empire's global influence and the pound-gold standard. The gold standard tied currencies to a fixed amount of gold, providing stability by preventing uncontrolled inflation or devaluation.
However, after the World Wars, economic challenges shifted the balance, and the US dollar began to gradually take over as the dominant reserve currency. Post-World War II, the US dollar became central to the Bretton Woods system, with many countries pegging their currencies to the dollar, enhancing global economic stability. The US emerged as a significant international creditor, with a robust economy and deep financial markets. Even after the gold standard ended in 1971, the US dollar retained its status as the global reserve currency.
Why the dollar still dominates
The US dollar remains the dominant reserve currency for several reasons. These include its importance in the global economy, its role in global finance and deep and liquid US financial markets. Despite accounting for only 10% of global trade due to limited US export focus, the dollar is extensively used as an invoicing currency. Estimates from the Fed show that between 1999 and 2019, the Federal Reserve estimated that the dollar facilitated 96% of trade transactions in the Americas, 74% in Asia, and 79% elsewhere.
The US also plays a significant role in the global economy, with the International Monetary Fund (IMF) forecasting a 26% share of global GDP for 2025. Moreover, the dollar is crucial in cross-border loans and international debt securities, with nearly 50% denominated in dollars. US financial markets are deep, providing substantial liquidity. This is illustrated by the fact that US Treasury securities are widely held abroad, especially by the eurozone, Japan and China. Finally, the US’s geopolitical and military strength also reinforces the dollar's hegemony.
No alternative to the dollar
Despite frequent headlines about de-dollarisation, the dollar is expected to maintain its central role in the world, albeit with some re-balancing to other currencies, as there is no real alternative to the US dollar. This is mainly due to the deep and liquid US markets. The euro, while a potential contender, is hindered by a fragmented bond market, and the German bond market is too small compared to the US. Moreover, the dollar’s turnover in over-the-counter currency markets is too large to be taken over by any other currency. Therefore, we expect the US dollar to remain the dominant reserve currency in the coming years.
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Georgette Boele
Senior Economist Sustainability Research