Is dollar's reign ending?

The Star

05-05-2025

THE US dollar's current and future role in the world monetary and financial order is under scrutiny.
Is the dollar's 'exorbitant privilege' status as the world's reserve currency truly at risk? Will the US dollar be dethroned?
The USD index (DXY), measured against a basket of currencies, has recently experienced a notable decline, falling to its lowest level in three years.
After appreciating by a cumulative 12.5% for three consecutive years (2022 to 2024), the DXY has declined by 8.3% as of April 2025.
Contrary to the prediction of standard theory and prior evidence from the Trump 1.0 tariffs in 2018, the US dollar, rather than appreciating, depreciated on concerns about the Liberation Day tariffs' impact.
Most of the Group of 10 currencies have appreciated against the US dollar.
A number of factors have weighed on the US dollar, including uncertainty over tariff policies and concerns that the tariff shock could trigger a recession or stagflation in the US economy, ultimately overshadowing the intended impact of the tariffs.
Additionally, foreign investors have rebalanced their portfolios as they reduced exposure to US dollar-denominated assets and switched into other currencies, raising spectre of investors losing trust in the US dollar under President Donald Trump's destructive tariffs impact on the world economy, particulaly the US economy, and global trade.
For many years, there have been prophecies that the US dollar will lose its status as the world's major reserve currency.
A wider tariff conflicts and an escalation of tit-for-tat between the United States and China, and the recent declines in the US dollar as well as a reduction in US dollar-denominated assets, have reignited talks that the US dollar would be heading to a sustained decline, precipitating flight as investors shift capital to safer alternatives.
Major holders of the US Treasury Securities (UST), namely Japan and China, have reduced their holdings over the years.
Japan has reduced its holdings of UST to US$1.126 trillion or 12.8% share as at end-Feb 2025, from US$1.251 trillion or 17.7% in 2020.
China's holdings of UST also trimmed substantially to US$784bil or 8.9% share at end-Feb 2025, from US$1.072 trillion or 15.2% share in 2020.
While the US dollar has lost some ground in recent decades to non-traditional currencies, it has retained its position as a leading reserve currency.
The US dollar's share of global reserves had reached a peak of 71% in 2000, and has since reduced to 62.3% in 2010, 58.9% in 2020, 58.4% in 2023 and 57.8% in 2024.
It is observed that since end-2020, the central banks' reserve diversification has not been towards the euro, pound sterling and the Japanese yen, but towards non-traditional reserve currencies such as Chinese yuan, and small, open as well as better managed currencies, including the Australian dollar.
The euro's share of global reserves declined from a peak of 25.8% in 2010 to 19.8% in 2024, while that of the yen's fell from 6% in 2020 to 5.8% in 2024.
Based on the available data, the yuan's share of global reserve, which was 1.23% in 2017, has increased over the years to remain constant at 2.3% in 2020 to 2024.
The latest data from the international payment messaging system SWIFT showed that the US dollar is the most used currency in the world for cross-border transactions (60.1% share) as of December 2024.
This is followed by the euro (12.8%), yen (5.1%) and pound sterling (4.9%). The yuan's share was 2.8%.
It is reckoned that the US dollar has not enjoyed the same hegemony of its 1990s heydays.
De-dollarisation and the long-term trend toward currency diversification in global trade and financial transactions are gaining momentum amid shifting global power dynamics.
Countries are increasingly seeking to reduce their reliance on the US dollar, driven by factors like geoeconomic fragmentation, geopolitical tensions, economic diversification, and the rise of alternative currencies and payment systems.
Prospects for the US dollar may not be as bright as they once were as some diversification from the greenback is underway as the world's economic centre of gravity is indeed shifting eastward towards China, India and other emerging markets.
What is the future of dollar hegemony?
The dollar's hegemony stems from the US's economic power, military strength and its influence in international political power play.
This can be observed in two distinct eras: (1) The Bretton Woods agreement (1944-1971) established a new international monetary system, with gold as the basis for the US dollar and fixed exchange rates; and (2) the neoliberal era (1980 until present).
The dollar hegemony is challenged by rising China's economic clout and efforts to internationalise its currency; evolving emerging economies (BRICS – Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Indonesia, Iran and the United Arab Emirates); and the shifting new world order, growing diversification of reserves away from the US dollar as well as increasing calls for a more balanced international monetary system.
Will the US dollar's dominance give way to a multipolar system of currencies?
A gradual decline in the US dollar's dominance in international trade and finance will see other currencies like China's yuan gaining prominence and playing a bigger role.
Since 2008, the People's Bank of China has established bilateral currency swap agreements with over 40 countries, making it a key global lender and providing access to yuan liquidity in exchange for their local currency, to facilitate trade and enhance financial stability.
China's currency swap strategy offers an alternative to the US dollar while extending its geopolitical reach.
However, yuan's lack of full capital account convertibility and concerns over transparency present challenges to its broader adoption.
Can the rise in the economic power of BRICS and its potential of creating a common currency provide a multipolar currency system to have a more balanced and orderly international monetary system?
BRICS has developed its own cross-border payment system, known as 'BRICS Clear', which aims to reduce reliance on the US dollar and facilitate transactions within BRICS countries using their own currencies.
Some 160 countries have signed up to use the system.
In 2015, China launched its Cross-Border Interbank Payment System (CIPS) to facilitate the clearing and settlement of cross-border transactions in yuan.
As of May 2024, CIPS has over 1,530 direct and indirect participants, including banks and financial institutions in major cities and regions around the world.
There are many considerations and hurdles for BRICS countries to create a common currency; it is not only used primarily to trade but also for broader financial needs.And to ensure the viability of a common currency, BRICS political, economic, and social context is crucial.
While BRICS countries using their local currencies to trade among themselves will lower the transaction costs and reduce reliance on the US dollar and other major foreign currencies, there are limitations for broader use due to the lack of demand for most currencies internationally.
For example, the use of local currencies (Indian rupees and Brazilian real) for trade settlement between India and Brazil, if either one country accumulates more rupees or real, the surplus currencies cannot be used elsewhere, unlike the US dollar, yen and euro, which are among the most widely traded currencies in the world given their high liquidity, stable value and widespread exchange.
Will the gold standard come back to replace the US dollar, pivoting to a monetary gold standard?
The United States is unlikely to return to the gold standard in the near future as the amount of gold reserves currently held by the United States is insufficient to fully support the money supply, which is a requirement for a full-fledged gold standard.
The United States holds approximately 8,133.46 tonnes of gold reserves, making it the largest holder of gold in the world.
The potential drawbacks of returning to the gold standard are it could restrict the US Federal Reserve's monetary policy flexibility, limit money supply and constraint government spending.
It could also hinder the government's ability to respond to economic shocks since it cannot print more money or adjust interest rates to stimulate the economy.
There are signs that point to a return to some kind of monetary gold standard.
In recent years, central banks, including China, India, and Russia have been hoovering up gold at an eye-watering pace.
In 2024, the central banks' gold purchases exceeded 1,000 tonnes for the third year in a row, and they bought 244 tonnes of gold in the first quarter of 2025, comfortably within the quarterly range of the last three years.
The rising popularity of cryptocurrencies have become all the rage and digital payment options have fuelled expectations for the replacement of fiat money.
While digital alternatives offer enhanced security, greater accessibility, transparency, and low transaction costs, its rigid supply, price volatility, a lack of regulation and technical barriers for some users hinder its capacity to serve as a medium of exchange, store of value, and unit of account, as envisaged by Modern Monetary Theory.
The United States' unsustainable debt path could lead to a self-inflicted demise of the US dollar over time.
With a budget deficit of 7% of gross domestic product (GDP) and national debt surging past US$34 trillion, over US$10 trillion debt added since 2020, the country's debt-to-GDP ratio is at 120% – one of the highest in the world.
The United States is expected to roll over nearly US$9 trillion in maturing debt within the next 12 months.
A default on the US debt could cause 'financial chaos' and have an 'adverse impact' on the dollar's status as the world's reserve currency.
A loss of confidence and trust in the US government and institutions could undermine the US dollar's position, opening the door for other currencies to gain a more dominant position.
Lee Heng Guie is the executive director of the Socio-economic Research Centre. The views expressed here are the writer's own.