The US dollar’s decline and the rising tide of de-dollarization

The US dollar still holds status as the world's primary reserve currency. This was achieved after the Second World War through the Bretton Woods Agreement, and it continues to dominate the world today. In recent years the share of USD in official foreign exchange reserves in central banks around the world has dipped below prior peaks, even as total reserves rose. The dollar is still dominating in the total traded FX volumes. According to the Bank for International Settlements (BIS), in 2022, the US dollar accounted for 88 % of all traded FX volumes globally. 

Even though the weakening of the US dollar started at the beginning of the year, the recent shutdown of the US government has increased uncertainty in the global markets. It has compounded fears about the US’ governance, fiscal discipline, and crisis management capacity. The reputational cost is real; policy reversals and unpredictable trade decisions all feed the narrative that the US might no longer offer the stability that was once taken for granted. 

At the same time a gradual shift is happening. Large commodity exporters and some BRICS nations are increasingly settling trades in local currencies instead of dollars. De-dollarization is also happening in the bond markets, where the share of foreign ownership in the US Treasury market has been declining over the last 15 years. Foreign central banks have reduced their holdings of US dollars and treasuries, in favor of gold, alternative currencies and digital assets. Today a large and growing proportion of energy is being priced in non-dollar-denominated contracts. Russian oil exported east, and south are sold in the local currencies of buyers, or in currencies of countries that Russia perceives as friendly.  

Although the US dollar still holds a strong position in the global economy, it is facing growing challenges. While it is unlikely to lose its status as the world reserve currency overnight, its dominance is slowly eroding. The dollar is backed by deep financial markets, trusted institutions and high global demand. Most international trade, loans and investments are still done in dollars. However, there are also growing risks. The US government has a rising debt level, frequent political fights like the ongoing shutdown, and questions about long-term stability are being raised. The dollar is not disappearing, but its role is changing. To remain strong, the US will need to show it can manage its economy and politics more responsibly. If it doesn’t, the world may seek alternatives.