‘Exorbitant privilege’: Can the US dollar maintain its global dominance?

Since the 1940s, the US dollar has held steadfast arsenic the planetary reserve currency,  driving planetary commercialized and reinforcing the presumption of the United States arsenic an economical superpower.

In caller years, however, immoderate countries person expressed absorption to the US dollar’s longstanding economical dominance.

The BRICS economical bloc, named for its founding members, Brazil, Russia, India, China, and South Africa, has actively sought to trim its reliance connected the US dollar. China has adjacent pushed for “de-dollarisation”, by promoting its currency, the yuan, and forming currency swap agreements with different countries.

Christine Lagarde, president of the European Central Bank, precocious noted that a “shift” was nether mode that would let for the “euro to summation planetary prominence”.

Lagarde said successful June that the euro accounts for astir 20 percent of planetary overseas speech reserves, and that the “dominant relation of the US dollar”, which accounts for 58 percent, “is nary longer certain”.

“History teaches america that regimes look enduring – until they nary longer are. Shifts successful planetary currency dominance person happened before. This infinitesimal of alteration is an accidental for Europe. It is simply a ‘global euro’ moment,” Lagarde said.

The dollar has besides weakened this year, experiencing its sharpest six-month diminution successful decades.

Global investors person been reacting to argumentation uncertainty nether the medication of US President Donald Trump, rising debt, and shifting involvement complaint expectations – with immoderate questioning its “safe-haven” appeal.

Experts accidental that successful the improbable lawsuit that the US were to suffer its reserve currency status, the interaction would beryllium profound, arsenic the state would suffer overmuch of its leverage to power planetary commercialized and enforce sanctions – planetary commercialized that does not straight impact the US often runs done the dollar.

Or, arsenic Trump told reporters earlier this month, “If we mislaid the satellite modular dollar, that would beryllium similar losing a war.

“We would not beryllium the aforesaid country.”

‘Exorbitant privilege’

As the planetary reserve currency, the US dollar underpins a monetary strategy wherever cardinal banks trust connected it to stabilise their economies, negociate indebtedness and instrumentality commercialized policies.

Historically seen arsenic a harmless investment, the dollar remains truthful profoundly embedded successful the planetary strategy that, contempt caller shake-ups, it is improbable to beryllium dethroned anytime soon, emboldened by a longstanding past of resilience.

The US dollar was enactment connected this people successful the 1930s, erstwhile then-President Franklin D Roosevelt centralised US golden reserves and tied the dollar to a fixed proviso of gold.

Then, successful 1944, the US spearheaded the Bretton Woods Agreement, which pegged planetary currencies to the dollar, starring to the instauration of the International Monetary Fund (IMF) and the World Bank.

With overmuch of the satellite recovering from warfare and the US holding the bulk of planetary golden reserves, the dollar emerged arsenic the anchor of the post-war fiscal system, and by the 1960s, gave the US what erstwhile French Minister of Finance Valéry Giscard d’Estaing called an “exorbitant privilege”.

In 1971, US President Richard Nixon severed the past remaining ties to the golden standard, an enactment that became known arsenic the “Nixon shock”, allowing the dollar to interval freely successful the unfastened market. Despite the question of changes, the US system remained strong, bolstered by its maturation successful manufacturing and information, which helped the dollar support its status.

Since the Nixon era, the dollar’s dominance has mostly lone strengthened, adjacent arsenic countries similar China person outpaced the US successful economical growth, colonisation and manufacturing output. The US has continued to wield disproportionate power done commercialized agreements and fiscal sanctions.

“Many times, adjacent betwixt emerging markets erstwhile 1 converts a currency, similar the Brazilian existent and the South African rand, for example, determination is simply a transaction to US dollars successful between, and so, the US extraterritorial powerfulness present stems from the information that different countries, planetary banks, don’t privation to suffer their entree to the US dollar-based fiscal system,” Rachel Ziemba, adjunct elder chap astatine the Center for a New American Security, told Al Jazeera.

This besides adds value erstwhile the US imposes sanctions.

“From a geopolitical standpoint, the US having a reserve currency gives it much flexibility to weaponise its currency via fiscal sanctions and the like,” Ziemba said.

Because transactions often walk done banks that enactment successful tandem with the US Federal Reserve, they tin beryllium taxable to US sanctions – adjacent if the US is not straight involved.

That is wherefore the fiscal sanctions imposed connected Russia aft its penetration of Ukraine led to a default connected Moscow’s sovereign debt. In 2022, sanctions from the medication of erstwhile US President Joe Biden efficaciously chopped Russia disconnected from dollar-based trade, freezing $300bn successful assets held by its cardinal slope and crippling its economy. As a effect of the sanctions led by the US, Russia’s gross home merchandise (GDP) fell by $104bn.

If the dollar did suffer its status, domestically, it would mean higher borrowing costs. Without overseas request for US debt, involvement rates would rise, driving up the outgo of mortgages and recognition cards. This is due to the fact that backstage banks peg their involvement rates to those of the Federal Reserve.

“It would mean the US nary longer has this large excavation of overseas savings to trust connected to support the US borrowing costs down. It’s benignant of a cardinal menace to the US economical exemplary of the past fewer decades, which has mostly been comparatively debased involvement rates, which has enabled consumers, firms and the authorities to concern a batch of indebtedness astatine comparatively inexpensive prices,” Pearce said.

“A nonaccomplishment of dollar dominance for the US means higher involvement rates successful the US, and that’s truly going to enactment unit connected demand. Mortgages are gonna get a batch much expensive,” helium added.

A caller epoch of economical uncertainty

Unlike successful Nixon’s era, erstwhile US dominance was mostly uncontested, the existent planetary system is much interconnected.

Emerging powers specified arsenic China and India person expanded their planetary influence, and alternate fiscal systems, including the emergence of cryptocurrencies, person gained traction. Repeated argumentation whiplash from 1 US medication to the adjacent risks undermining that stableness successful a scenery of increasing threats.

Trump’s erratic attack to tariffs and planetary agreements has revived doubts astir the US’s reliability connected the satellite signifier and raised semipermanent concerns astir the stableness of the dollar.

“I deliberation Trump has done much than anybody successful modern past to undermine cardinal institutions,” said Alex Jacquez, a peculiar adjunct to the president for economical improvement astatine the White House National Economic Council nether Joe Biden.

After Trump’s archetypal term, planetary partners felt the US had returned to diplomacy nether Biden, Jacquez told Al Jazeera.

“When I came successful with the Biden medication and worked connected these issues, certainly, we had our disputes and our issues with our trading partners, but the planetary assemblage welcomed america backmost with good-faith negotiations. But that came with scarring and symptom with their interactions with the Trump administration.”

However, Jacquez noted that regaining that spot whitethorn present beryllium harder. This is not simply due to the fact that of Trump, but besides due to the fact that of the broader signifier of reversals successful US argumentation that his medication has driven.

Jacquez argues that predominant U-turns, abrupt withdrawals from agreements and threats to longstanding alliances person created planetary instability, making it hard for different nations to formulate semipermanent plans, which could compromise the semipermanent stableness of the dollar.

That comes alongside Trump’s taxation legislation, which helium precocious signed into law, and is expected to adhd $3.4 trillion to the national deficit. This is stoking fears astir semipermanent US economical stability, perchance raising borrowing costs that could interaction planetary investors, cardinal banks and mundane consumers.

In 2023, then-Senator JD Vance questioned the worth of the dollar arsenic the planetary reserve currency successful an speech with Federal Reserve Chairman Jerome Powell.

“I deliberation successful immoderate ways, you tin reason that the reserve currency presumption is simply a monolithic subsidy to American consumers, but a monolithic taxation connected American producers,” Vance said.

But since Trump took bureau with Vance arsenic vice president, tariffs person enactment unit connected US producers, not the presumption of the dollar.

There are besides concerns implicit Trump’s attempts to power the Federal Reserve, which could interaction the presumption of the dollar. The president has agelong criticised Powell for not lowering involvement rates, and has threatened to occurrence and regenerate him.

Earlier this month, US Secretary of the Treasury Scott Bessent told Bloomberg that the White House has begun the ceremonial process of uncovering a successor for Powell, whose word ends successful 2026. This comes amid reporting from CBS News that past week, the president asked a radical of Republican lawmakers if helium should occurrence Powell.

However, Trump told reporters aboriginal that firing Powell was “highly unlikely”.

“Policies of that nature, which would marque investing successful US treasuries risky, peculiarly for overseas investors, I deliberation that would marque maine a spot much acrophobic astir a nonaccomplishment of reserve currency status,” Michael Pearce, lawman main economist astatine Oxford Economics, told Al Jazeera.

“Tariffs and different policies person taken that benignant of US exceptionalism disconnected the array astatine slightest for this year. We expect the US to beryllium comparatively hard-hit by these tariffs compared to the remainder of the world. However, erstwhile you deliberation of the semipermanent performance, it’s inactive a comparatively dynamic economy,” Pearce added.

Contenders for the planetary reserve currency

There are groups of nations that are progressively positioning themselves to instrumentality connected a larger relation successful planetary finance, but nary has yet matched the dollar’s influence. This means it is improbable that immoderate currency could regenerate the dollar arsenic the de facto planetary reserve currency.

But determination are attempts to situation the US’s influence. BRICS nations person moved to trim their reliance connected the US dollar successful caller years, which has go a increasing interest for Trump.

At the aforesaid time, the European Central Bank is besides pushing for the euro to play a much cardinal relation successful the planetary system, but arsenic Lagarde noted successful her essay, a “step towards greater planetary prominence for our currency volition not hap by default: it indispensable beryllium earned”.

Despite attempts by different nations to grow their power implicit the planetary reserve, and the caller diminution successful the dollar’s value, economists reason that it is improbable the dollar volition suffer its presumption arsenic the world’s reserve currency. And, if it did, it mightiness instrumentality decades to adjacent spot a insignificant shift.

“It’s decidedly premature to interest astir the dollar losing the planetary reserve currency status. Even if [it did], that would instrumentality aggregate years for that to happen,” Hong Cheng, the caput of fixed income and currency probe astatine Morningstar, told Al Jazeera.

Pearce besides said that a alteration successful the planetary reserve hierarchy was unlikely.

“A melodramatic displacement successful which the US intelligibly loses its spot atop the pile, I deliberation that’s acold disconnected the cards. I find it hard to spot immoderate viable contender emerging to the dollar successful that sense,” Pearce said.

Instead, experts accidental a much realistic aboriginal could impact a multipolar currency system, wherever the dollar shares its relation with different large currencies, including China’s renminbi.

“We could beryllium heading into immoderate benignant of multipolar reserve currency situation wherever determination is an further relation for currencies similar China’s renminbi. There’s nary 1 wide alternate currency,” said Ziemba, the adjunct elder chap astatine the Center for a New American Security.

Even if a modulation were to occur, it would instrumentality decades.

“You would request benignant of a managed unwinding done either coordination oregon benignant of immoderate benignant of alternate strategy to emerge, which again would instrumentality time,” Jacquez said.

While the dollar’s stock successful planetary reserves has declined, it is not astatine an unprecedented low.

“The dollar stock successful FX [foreign exchange] reserves was little successful the aboriginal 1990s, truthful the caller diminution successful its stock is not wholly retired of the norm to conscionable nether 60 percent,” according to JPMorgan Chase.

In emerging markets, “the aforesaid ratio of USD reserves arsenic successful 1995” inactive holds. Even aft caller sell-offs, including 1 by China successful April, analysts bash not expect a large impact.

Countries often clasp US Treasuries arsenic liquid assets, which provides stableness to their ain currencies, truthful unravelling the US dollar’s presumption could besides undermine their ain interests.

“With much than 30 percent of overseas Treasury holdings maturing successful the adjacent 2 years, planetary investors are much apt to fto these assets mature and take to reinvest portion of the proceeds elsewhere. We deliberation large-scale selling is unlikely,” the enactment added.

That signals that the US dollar volition apt stay ascendant for the foreseeable future.

“I don’t deliberation there’s 1 ascendant currency that’s gonna regenerate the dollar. And if determination was hypothetically a change, I deliberation that’s going to instrumentality galore years to shift,”  Cheng added.

“We’re talking astir the adjacent 20, 30, oregon adjacent 50 years.”