Donald Trump brought the issue of “dollar dominance” to the spotlight once more. As the election campaign enters its final stage, one of his main messages was, “We will keep the US dollar as the world’s reserve currency”, explaining that the dollar was “under major siege” as “many countries are leaving the dollar”.
The once almighty dollar’s role has changed because of the recent geopolitical changes, including the trade war between the U.S. and China and the war in Ukraine, but also the increasing fragmentation of global economic policies.
These two strengthened the efforts of some, like the BRICS countries, to move away from the dollar by diversifying their reserve holdings. Though the renminbi benefited the most from these trends, other “nontraditional” currencies like the Australian or Canadian dollar also saw increased demands.
While Trump’s campaign might benefit from the simplistic message of “the dollar being in need of saving”, reality is a bit more complex.
First, significant shifts like this take decades.
An April 2024 JPMorgan study not only points at this, but also emphasized that declining FX reserve holdings should not be misinterpreted as a move towards de-dollarization.
Several other studies share this view.
One was published by the IMF just days ago, under the title Geopolitical Proximity and the Use of Global Currencies. Authors Jakree Koosakul, Longmei Zhang, and Maryam Zia offer a comprehensive analysis of how geopolitical proximity and economic factors influence the usage of major currencies in cross-border transactions. This research sheds light on the evolving roles of the U.S. dollar, euro, Chinese renminbi (RMB), Japanese yen, and British pound—currencies that are integral to the Special Drawing Rights (SDR) basket—against the backdrop of rising global tensions such as the Russia-Ukraine conflict and escalating U.S.-China trade disputes and countries’ growing efforts to diversify their reserves to avoid over-reliance on the dollar.
Available data all suggests that the USD’s share in global foreign exchange reserves has been steadily in the decline since the peak of 1999. Back then, the USD represented 71 percent of global reserves, by 2022, it shrank to about 58 percent. On the other hand, the use of nontraditional currencies, particularly the Chinese renminbi (RMB), has been gradually rising.
As the international monetary system is a continuously evolving structure, changes like this are inevitable. Before World War I, there was the “gold standard”, then came the “gold exchange standard” with the dollar and the pound sterling sharing the role of reserve currency. After WWII, Bretton Woods “institutionalized” the dominance of dollar – and it worked until its collapse in 1973, when the era of floating exchange rates and increasing capital account liberalization arrived. It was only thanks to the interplay of several geopolitical factors that the dollar’s role has been mostly unaffected afterwards, in spite of the rise of other countries’ share in global nominal GDP.
It seems that times have finally caught up with economic realities, as the current crises hastened the currency revolution.
But again, it is not good vs bad, China vs U.S.
Geopolitical proximity, measured through voting patterns in international bodies like the United Nations, plays a critical role in determining currency preferences. Interestingly, recent studies reveal that countries with weaker geopolitical alignment with the U.S. often exhibit higher usage of the dollar. This phenomenon is linked to the dollar’s role as a global vehicle currency, particularly in countries with weaker domestic currencies. In such contexts, the dollar’s stability and liquidity continue to make it a preferred choice for international transactions despite shifting geopolitical alignments.
Countries that align politically with the Eurozone or China tend to favor these currencies in cross-border transactions. This trend is especially pronounced for the euro in regions with strong political and economic ties to Europe. For the RMB, the influence of geopolitical proximity is more significant during periods of heightened trade policy uncertainty, such as during the U.S.-China trade war.
While the U.S. dollar has broad dominance, accounting for more than half of payments in most regions, the euro plays an eminent role in most of Europe and parts of Africa. The RMB has gained traction in parts of Asia, such as Mongolia and Laos.1 Interestingly, the U.S. dollar has a larger presence in China for cross-border payments than the RMB itself. Outside of Japan, the Japanese yen is mainly present in Thailand’s cross-border transactions. The British pound is frequently used in Europe and parts of Africa.
Moreover, BRICS countries have a clear desire to reduce their dependency on the dollar.
Historically, commodities like oil and natural gas have been traded in US dollars. But for China and India, two major oil importers, the expanded BRICS bloc offers an opportunity to negotiate oil imports in their own currencies, reducing dependence on the dollar-based system. China has already taken steps in this direction, establishing currency swap agreements with key oil producers like Russia and Saudi Arabia to settle oil transactions in renminbi.
After the 2023 BRICS Summit, China and Saudi Arabia renewed their currency swap agreement and signed a memorandum of understanding to explore developing a Central Bank Digital Currency (CBDC). This step signals a potential move towards a multi-currency cross-border clearing system, which could further reduce the US dollar’s dominance in commodity pricing and trading.
Geopolitics also plays a significant role in influencing the dollar’s share. Sanctions, especially against Russia and Iran, have made many nations rethink their reliance on the U.S. financial system.
Following Russia’s annexation of Crimea in 2014 and subsequent sanctions, Russia began a concerted effort to reduce its dollar reserves in favor of other currencies and assets like gold. This trend was accelerated after the 2022 Russian invasion of Ukraine, when even more severe sanctions were imposed on the country. As a result, Russia has pivoted toward the Chinese renminbi and the euro, and the “de-dollarization” trend has spread to other nations fearing similar economic repercussions.
Meanwhile, the U.S.-China trade war further strained global economic relationships. China, under pressure from tariffs and diplomatic rifts, has been motivated to reduce its reliance on the dollar, promoting the use of its own currency, the renminbi, for international trade and investment. The culmination of these tensions is a decline in the dollar’s reserve share, a shift that is not isolated but part of a broader global reevaluation of financial dependencies.
All this could lead to a fast (faster) change, if it were not for the inertia in currency preferences. Past transaction patterns have a strong influence on current choices, slowing down changes.
All the above means, that a slow, but mostly inevitable journey to a multipolar currency system has been on its way for quite a while; but it is still very much “under construction”. And since “after decades of increasing global economic integration, the world is facing a growing risk of geoeconomic fragmentation”, it is unlikely that the world will somehow return to complete dollar dominance. Alternative currencies will very likely play a greater role in cross-border transactions.
Thus, Trump might be right when he observes the weakening role of dollar, but it is not definitely a short-term risk that requires fast and hard response, neither is it one that can be solved by “brute force” or without significant changes of foreign policy, first and foremost, American foreign policy.
While less wars (either trade or “real” ones) could slow down the process, both the euro and renminbi are emerging as significant contenders, reflecting the broader trend of geoeconomic fragmentation.
