The global economy has long been dominated by the US dollar. This dominance reflects America’s economic, financial and military power. However, recent shifts in global trade and finance have raised questions about the dollar’s future role. US trade policies under President Donald Trump triggered uncertainty. These policies aimed to reduce trade deficits but also challenged the dollar’s supremacy. Today, experts debate whether the dollar will maintain its hegemony or if alternatives will emerge.
Historical Context of Dollar Dominance
After World War II, the US dollar became the world’s leading currency. The Bretton Woods system in 1944 cemented this status. The US then accounted for one-third of global GDP and half of international trade. Europe was recovering from war damage and the UK’s pound sterling lost its dominant position. The dollar became the main currency for global trade and reserves.
Current Status of the US Dollar
By 2024, the US share of global GDP dropped to 25 per cent and its share in global trade to under 17 per cent. Yet, the dollar remains dominant in key areas. Over 50 per cent of export invoicing uses the dollar. It makes up 57 per cent of official foreign exchange reserves. Around 88 per cent of foreign exchange transactions involve the dollar. No other currency rivals this scale.
Indicators of Dollar Decline
Despite its strength, signs of decline are visible. The share of US dollars in global foreign exchange reserves fell from 72 per cent in 2000 to 58 per cent in 2024. Foreign holdings of US Treasury securities dropped from nearly 48 per cent in 2015 to 34 per cent in 2024. These trends suggest reduced confidence in the dollar as a store of value.
Rise in Gold Reserves
Many countries increased their gold reserves since 2010. Gold holdings rose by 58 per cent between 2010 and 2014, equal to 173 million fine troy ounces. Rich countries maintained or slightly reduced gold stocks. Middle-income countries like Russia and China raised gold reserves . India also increased its gold holdings. China’s recent policy may boost gold demand further.
Dollar’s Role in Debt and Finance
The dollar dominates foreign currency debt issuance globally. This supports its role as a global financial anchor. The US Federal Reserve’s index shows the dollar’s international usage has remained stable since 2010. The dollar’s share of international payments increased from 32 per cent in 2010 to 47 per cent in 2024. US control over global financial markets sustains this dominance.
Future Prospects
The dollar’s future depends on US ability to maintain financial market control. Trade tensions and tariff wars may accelerate shifts toward alternative currencies or multipolar currency systems. Some predict the Chinese RenMinBi could challenge the dollar’s role. Others foresee a period of uncertainty with no clear dominant currency emerging.
Questions for UPSC:
- Critically discuss the factors that contribute to the US dollar’s dominance in the global economy and the challenges it currently faces.
- Examine the impact of trade policies and tariffs on international currency hegemony and global financial stability.
- Analyse the role of gold as a reserve asset in the context of declining reliance on the US dollar and its implications for global economics.
- Estimate the potential effects of emerging currencies like the Chinese RenMinBi on the international monetary system and global trade patterns.
