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Is the dollar's dominance coming to an end?

As the United States confronts the expanding global outreach of Chinese as well as Gulf state investment, the battleground between the two sides has spilled over into developing economies, a struggle that commentators fear is leading to the “de-dollarization” of the global economy. In a state visit to China this April, new found Brazilian President Luiz Inácio Lula da Silva openly admitted, “Every night I ask myself why all countries have to base their trade on the dollar,” while Saudi Arabia Finance Minister Mohammed Al-Jadaan notoriously expressed in March that “there are no issues with discussing how we settle our trade agreements, whether it’s in the U.S. dollar, the euro, or the Saudi riyal.”

Currency Composition

Source: International Monetary Fund

Reflecting these comments is the US dollar’s shrinking share of global foreign exchange reserves over the last two decades, from over 70 % in 1999 down to 59 % in 2021. While still representing a greater share than the rest of the worlds’ currencies put together, the seeming decline of the dollar has fueled what economist Paul Krugman considers to be “dollar doomsaying,” or the “frenzy” that is “talk of ‘de-dollarization’ and its dire consequences for the U.S. economy.” Krugman argues that the dollar’s slightly waning global presence hardly affects the US economy, believing that commentators make “such a big deal” over the issue because “global currency issues come across as glamorous and mysterious… You have to actually work with the numbers to appreciate how little is really at stake.”

Principal among the supposed economic benefits of dollar dominance is that it enables the US to run larger trade deficits, given that other countries will have a large supply of US dollars that they can purchase US goods with. While the US does have the world’s largest trade deficit, it only makes up 3.7 of the country’s GDP, a far smaller percentage than dozens of other nations’. Furthermore, there is hardly any evidence to suggest that either a trade deficit or a trade surplus is inherently beneficial. Balance of payments reflects the individual profit-minded decisions of private parties. While a trade deficit may threaten certain domestic industries within a country, it would also present with it lower prices and a greater supply of the import in question. Conversely, to respond to supporters of “dollar dominance,” a trade deficit corresponds with a net capital outflow in order to finance the import of such goods. Like in any economic exchange, there are costs and benefits, but the wider composition of a country’s balance of payments hardly ought to be a concern, at least according to economic theory.

In the larger picture, however, there also remains sizable doubt that the US dollar is even losing its global reserve currency status in the first place. As shown before, while government officials have expressed some concerns with dollar-fueled trade, it’s worth remembering that trade between countries is largely a private operation taken on by profit-motivated actors. Not only that, but “dollar dominance” manifests itself in other avenues, such as in the global banking system and its appearance in aid packages and loans through the IMF and World Bank. While one may point to its declining share of nations’ global reserve currencies, the more complicated truth lies behind the convenient lines and infographics. Dollar dominance, for better or for worse, may be here to stay.


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