Understanding the Current State of the Dollar

In recent discussions around global finance, a notable theme has emerged regarding the future of the U.S. dollar. Many critics of U.S. dominance dismiss the dollar’s resilience based on their aversion to American influence. It’s essential to clarify that under 5% of dollar transactions relate to trade; the vast majority involve financial exchanges. The push for alternative payment methods is primarily aimed at reducing the impact of U.S. sanctions on international trade, a strategy that has had mixed results, as seen in the case of Iran. However, a shift to trade payments outside of the dollar framework is unlikely to significantly undermine the dollar’s prevalence.

Seeing commentary, particularly from vloggers who should have a clearer understanding of the dollar’s dynamics, proclaiming that the dollar is in crisis is exasperating. Historically, the dollar was much weaker during the dot-com bubble and the aftermath of the 2008 financial crisis—yet, at that time, we did not witness the same panic over dollar instability.

The dollar’s eventual decline is a possibility, but as noted by Jomo Kwame Sundaram, we are still far from that reality. Although Chinese President Xi has expressed ambitions for the renminbi to ascend as a reserve currency, significant structural changes are necessary—such as regular trade deficits to increase the renminbi’s global circulation and the removal of capital controls—which are yet to be implemented.

By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at Jomo’s website

The Dollar’s Gradual Erosion

The role of the U.S. dollar as the principal reserve currency has been diminishing gradually over the years. Various policies from the U.S., especially unconventional recent decisions, have occasionally expedited this trend toward de-dollarization.

Tracing Dollarization

In light of warnings from economists like Keynes regarding potential pitfalls, Harry Dexter White enforced an indirect gold standard during the 1944 Bretton Woods conference. This established the dollar as the world’s reserve currency, with other nations pegging their currencies to it at stable exchange rates.

To this day, approximately 90% of foreign exchange transactions involve the dollar, and it constitutes the basis for over two-fifths of international trade invoices. Although the U.S. economy represented 25% of global output after World War II, its share has diminished to below 15% in recent years. Similarly, the dollar’s influence persists despite the shrinking U.S. export market share, primarily due to the robust nature of American capital markets.

Declining Influence of the Dollar

The relative decline of the U.S. economy, characterized by greater financialization and de-industrialization, has influenced the dollar’s dominant role. Recent statistics reveal a decrease in the dollar’s share of foreign reserves—falling from 70% in 2000 to under 60% in 2021, and further to below 58% in early 2025.

Some commentators, including Ben Norton, argue that the real share of dollar reserves may be even lower, as some central banks discreetly hold reserves away from U.S.-based scrutiny to protect them from potential sanctions.

Speeding Up De-Dollarization

De-dollarization efforts date back decades, even while the dollar-gold peg was actively upheld. Recent U.S. policies, especially under the Trump administration, have heightened foreign apprehension surrounding dollar-denominated assets, particularly through tariffs and aggressive sanctions. Trump’s efforts to manipulate monetary policy also diminished trust in American financial systems, leading to heightened market volatility.

As foreign governments and investors search for alternatives to the dollar, the outlook for dollar dominance remains ambiguous. Eichengreen previously expected a gradual decline in the dollar’s prominence, yet the rapid changes have prompted a reconsideration of that timeline.

Is There a Viable Alternative?

Nonetheless, Eichengreen contends that no other currency is fully equipped to replace the dollar. The euro and renminbi lack both the capacity and the global influence required. In this context, privately issued cryptocurrencies have mostly failed to establish themselves as accepted forms of currency and are often associated with illicit activities. Eichengreen describes the dollar as “the cleanest dirty shirt in the pile,” indicating that its status remains, for now, relatively unchallenged despite growing alternatives.

In conclusion, while the dollar’s dominance is under scrutiny and faces slower erosion, its position as a global reserve currency is still intact for the foreseeable future. As nations explore alternatives, the transition is likely to be complex and gradual, with no immediate threat to the dollar’s supremacy.