While the US dollar will not be replaced as the world’s most popular currency overnight, a concerted attempt to undermine its dominance has the potential to erode the dollar’s place in the world. Chelsea Jia Feng/Insider
The US dollar isn’t just for Americans—every country in the world depends on it.
The greenback has facilitated the flow of money and goods around the world for over a century. Buy or sell oil? Usually this is done with dollars. Countries issuing government bonds? Typically, these bonds are priced in US dollars. For generations, the dollar has been investors’ safe haven when markets crash and systems go haywire. The US even reminded everyone how influential the dollar is when they effectively locked Russia out of the global financial system with sanctions last year.
But if one listens to certain areas of finance and the internet, the dollar’s reign as the world’s preferred financial instrument could be coming to an end. Motivated by a mix of politics and business, countries from Israel and France to Russia and China have signaled they want to do more business in currencies other than the US dollar. Central banks have also started to move away from the dollar, with currencies like the Chinese yuan, Japanese yen and euro taking up a growing share of global reserves.
Financial experts tell me these bleak doomsday scenarios are exaggerated, but in classic conspiracy fashion, there is a grain of truth in the panic if you look closely. The proportion of financial transactions denominated in US dollars has declined in recent decades, and the proportion of countries’ dollar cash reserves is declining.
While these changes are notable, they do not mean that the US dollar’s dominance is about to end. There may be changes around the edges, but as Stanford finance professor Chenzi Xu told me, there’s still no viable alternative to cold, hard American cash.
“What currency would these countries hold instead?” Xu said. “We need something that looks like money and behaves like money. If you don’t hold dollars, there is no alternative because anything else is too small or has the same risks as the dollar, only worse.”
While the US dollar will not be replaced as the world’s reserve currency overnight, there is a risk that a concerted attempt to undermine its dominance will erode the dollar’s place in the world and cause real changes in the financial system. If America wants to stay on top, the US must not take the dollar’s status for granted.
The long arm of the dollar
Over the past five centuries, only a handful of countries have issued the bills that conduct the world’s financial transactions – the world’s reserve currency. Trust is key to becoming an issuer of the global reserve currency. Whether it was the Dutch guilder, French franc, or British pound sterling, people trusted that the value of that currency – backed by the country’s government – would remain stable enough to be used as a benchmark for a transaction to serve. Political instability or prolonged economic downturns can erode that trust until one day the currency is replaced by cash from a country that is more powerful, economically stable, and therefore more trustworthy.
For the past 102 years, the US has been at the top of the currency pile. And the globalized nature of the world economy means the US dollar has gained stronger status than previous reserve currencies. This so-called “exorbitant privilege” puts America at the forefront of an asymmetric financial system, granting the US great trade advantages and cushioning the backlash of other nations’ economic volatility. These dynamics also mean that the Federal Reserve – which is responsible for printing and controlling US dollar supply – is being closely watched around the globe. The rest of the world pays much more attention to its policy decisions than, say, the European Central Bank or the People’s Bank of China. Ron Temple, chief market strategist at Lazard, told me that the US dollar achieved this vaunted status thanks to more than a century of rule of law and stable markets, which helped earn investor confidence.
“In every country in the world, there are people who have stashed $100 bills for security reasons,” he said. “This was especially true after World War II, when the US dominated manufacturing and trade while other countries were still rebuilding after the war. The US was merely an economic power with robust institutions that could withstand partisanship and conflict.”
The US has controlled the global reserve currency for 102 years – giving it special status in the world economy. CFOTO/Future Publishing via Getty Images
Today, according to the International Monetary Fund, nearly 60% of international reserves are held in dollar-denominated assets, and the dollar is by far the most commonly used trading currency. Data from the Bank for International Settlements shows that the dollar is involved in about 88% of all international trade transactions. A good litmus test to see exactly how much impact a reserve currency has is to look at what happens during financial crises. And for a century, investors have consistently turned to assets they can convert to dollars.
Countries like China or Saudi Arabia are doing their utmost to “point their nose at the US,” Gregory Brew, an analyst at consultancy Eurasia Group, told me, but until American assets are no longer viewed as the best than Option in times of disaster, the dollar is not likely to lose its place at the top of the chart anytime soon. However, given that the country that controls the global reserve currency has held that status for an average of 94 years, history seems to indicate that it’s high time for a successor. While the length of time may be long, talks of de-dollarization are evidence that a new movement may be underway.
threats to hegemony
The global economic order as we know it will end with Operation Sandman.
When Operation Sandman begins, the theory is emerging, 100 countries around the world will sell trillions of dollars worth of US government debt in a coordinated action to erode the dollar’s value and break America’s dominance of the world economy. The move will be disastrous for America and the world order, but in time an attempt to break the US dollar’s grip on the world will open the door to a new hierarchy of economic superpowers.
If this all sounds a little far-fetched, it’s because most of the discussion of Operation Sandman is limited to the babble about economic and currency conspiracy accounts on Reddit and TikTok. This “mother of all dollar conspiracies,” as one Reddit user dubbed it, would certainly be a momentous start to a new chapter, but there’s little sign of it coming to fruition in practice.
“I think we live in a conspiracy era,” Eurasia’s Brew said. “There is an ongoing interest in certain online communities in the notion that the global economy — and the world of fiat currencies in particular — is on the brink of a systemic collapse.”
We have seen a sharp decline in global interest in US dollars
Despite the mad tendencies of Operation Sandman’s biggest fans, they have one thing right: there’s clear evidence the world is losing its dollars.
Stephen Jen, chief executive officer of Eurizon SLJ Capital and a former IMF economist, caused a stir in business circles when he told clients in April that “the erosion of the dollar’s reserve currency status has accelerated at an alarming rate in recent years.” .” According to Jen’s calculations, the proportion of global reserves held in dollars experienced a sharp decline in 2022, shrinking at nearly 10 times the average annual pace over the past two decades. In 2003, the dollar accounted for about two-thirds of world reserves, but Jen said his data showed that figure had fallen to about 47% — a much lower figure than the IMF’s 60% estimate.Other groups couldn’t see such a large drop, he told me, because they underlay fluctuations in the market do not take into account the underlying value of dollars in central bank coffers.
Jen told me that while countries outside the US still use dollars a lot, appetite for the currency has waned recently. “We have seen a sharp drop in global interest in US dollars,” he said. “After 15 years of very gradual declines, we’ve seen a dip over the past year, an absolute dip.”
Most move away from the dollar is due to politics. The world is realizing how America-centric the financial world has become, Jen explained – a far cry from the multipolar nature of the cultural and political landscape. And the economies of developing countries have grown larger and more complex in recent decades, meaning there is less reason to remain anchored in a financial landscape dependent on the dollar and the Fed.
“There is a valid argument for asking whether other countries should get along with a unipolar currency world,” Jen said. “There is a disconnect between the two – the financial world and the real world.”
That’s an interesting way of thinking. Why shouldn’t the world of finance more closely resemble the mosaic of cultures, politics and nations that exists today? Of course, it’s something other world powers like Russia and China would also want. When the US froze hundreds of billions in Moscow dollar reserves, it served as a reminder to other countries that the dollar can indeed be used as a weapon.
Stanford’s Xu told me that other countries think, “If I find myself in the position of Russia, where all my dollar assets are useless, then it makes sense to go back to our own national currency.” While it would make each transaction more difficult, Xu added adding that it “could protect you from major shocks if you couldn’t use your savings.”
China, for example, has made a concerted effort to promote its currency – the yuan – for international trade as a hedge at a time of rising geopolitical tensions with the US. Although China’s yuan accounts for less than 3% of global reserve currencies, its share of the pie has grown at the fastest rate of any currency since 2016. Meanwhile, Saudi Arabia, France, Brazil, India, Pakistan, Bolivia, Iraq and others have either entered into yuan deals or indicated their willingness to participate in yuan-denominated deals in the future. These make up a tiny fraction of total dollar transactions, but the trend is emerging.
“There’s a very strong political element to this, especially given the deteriorating US-China relationship,” Eurasia’s Brew told me. “From China’s perspective, de-dollarization reduces their exposure to US influence and potential future sanctions. It is becoming clear that the two will compete economically and diplomatically, and the yuan will become a political engine for other countries interested in improving their relations with China.”
Meanwhile, the BRICS countries – Brazil, Russia, India, China and South Africa – have indicated that they want to adopt a common currency designed to compete directly with the dollar. “Every night I wonder why all countries have to base their trade on the dollar,” Brazil’s left-wing President Luiz Inácio Lula da Silva said in April. “Why can’t we trade based on our own currencies?”
There are many other threats to the dollar as well: digital currencies, unexpected backlash from US sanctions, even the Fed. Josh Lipsky, executive director of the Atlantic Council, said the Fed’s aggressive rate hikes over the past year and a half have widened the exchange rate differential between many developing countries and the US. This makes the debts of other countries more expensive.
“Other economies have felt the pain of the dollar very badly,” Lipsky said. “There is little evidence of de-dollarization, but it is increasing.”
Small shifts, long waves
For most people whose financial lives consist of paying bills, buying gas, and getting a mortgage, the idea of de-dollarization seems far-fetched. It’s not like the average American will be signing a cross-border oil deal any time soon, or that the grocery store will refuse dollars. The experts I spoke to agreed that unless you regularly transact at the institutional or country level, Americans are unlikely to see the direct impact in their everyday lives.
But for companies transacting at the institutional level, a weaker dollar – a possible consequence of de-dollarization – could gradually reduce demand for the dollar and diminish its position as the currency of choice for large deals.
JPMorgan strategists Alexander Wise and Jan Loeys told clients they expect little de-dollarization over the next decade. Furthermore, should the dollar’s status deteriorate further, it’s possible that US assets could take a hit – lower stock holdings, higher bond yields, more expensive imports. According to Wise and Loeys, the greatest threat is that the geopolitical position of the USA will be affected.
“Dedollarization per se is likely to have little impact on growth and inflation, but the adverse events that could catalyze dedollarization would likely exacerbate both,” wrote Wise and Loeys in June.
If the reserve currency role is about trust, then any departure from the US dollar would indicate a loss of confidence in America – in its government, its economy, its financial system. The events that would lead to this loss of faith would clearly be negative for our economy and society. A politically-driven default or a sudden divestment of American assets (albeit less coordinated than in Operation Sandman) would undermine that belief — though neither has historical precedent.
I don’t think anything is permanent and other countries might eventually be willing to use something other than the dollar.
The most likely path ahead, according to the JPMorgan team, is partial de-dollarization spanning several decades, with the Chinese yuan the most likely candidate to limit the dollar’s share of trade and reserves. But switching to the yuan would bring a new set of problems, from China’s mainland cash withdrawal rules to the country’s own economic woes. It’s not even clear if Beijing wants its currency to assume the reserve role.
For Stanford’s Xu, fears of de-dollarization are largely unfounded given the sheer volume of greenbacks floating around in the global financial system. It is estimated that half of all international loans and trade invoices are denominated in dollars, and as more companies and governments use the dollar as a benchmark, liquidity will increase. For de-dollarization to take place, it would need to create a very large pool of safe, low-risk debt backed by another currency, and Xu said that would likely require a crisis scenario in which everyone dumped their dollars at once. And here, too, the probability of either event occurring remains low.
“Having the reserve currency is clearly a good thing for the US,” Xu said. “To sustain this will require a certain level of goodwill in the world and if the US can pull this off, it will continue to provide safe assets to the international economy.”
The panic is overdone, but the trend is real
It’s easy to poke fun at conspiracies on Reddit, but behind the rumors of de-dollarization lies the truth. It’s real and it’s happening – but at a much slower pace than recent headlines suggest.
However, rather than dismissing it entirely, America’s leaders – from Congress to the Fed – should take all of this talk as a reminder not to take coveted status for granted. Fooling around with Fed policy, threatening a US default or hasty imposition of financial sanctions, Lazard’s Temple said, was doing America a disservice. A century of the highest currency shouldn’t make anyone think we’re going to have another century.
“We should always be aware that there are tremendous benefits to be gained from maintaining the status of the dollar,” Temple said. “I don’t think anything is permanent and other countries might eventually be willing to use something other than the dollar. The ‘exorbitant privilege’ we have had for decades is not a birthright.”
Phil Rosen is senior reporter for Insiders, covering markets and the economy.