Dollar’s Diminishing Grip

Since World War I, for over a century, the US dollar has been reigning supreme in the world economy. Its position as the global reserve currency was recognised at the Bretton Woods Conference in 1944 which fixed the US dollar to gold at the parity of USD 35 per ounce. All other currencies had fixed, but adjustable, exchange rates to the dollar. Thus a ‘Gold Equivalent Standard’ emerged in the global monetary system. The US dollar’s dominance was reinforced by America’s post-war industrial power and military supremacy. In 1965, around 73 per cent of the global foreign exchange reserve was maintained in USD. Pound sterling was the only other major currency, with a global share of nearly 26 per cent, used as foreign exchange reserve. The dollar was born in a world where the US commanded moral authority, industrial might and trust. The US cannot lead the world by force forever. Sooner or later, people will stop following it. Over the years, the trust in US leadership has eroded.

Nonetheless, due to the prominence of the US in the global capital markets and international debt, the US dollar continues to play a significant role in the global economy. Between 1999 and 2019, the USD accounted for 96 per cent of trade invoicing in the Americas, 74 per cent in the Asia-Pacific region, and 79 per cent in the rest of the world. In April 2022, the US dollar was used in 88 per cent of all foreign exchange trades, though the share of US trade in the total global trade is only around 11 per cent.

Declining Importance of US Dollar

A reserve currency is a foreign currency that is held by governments, central banks or other monetary authorities as part of their foreign exchange reserves. The importance of the reserve currency lies in the fact that it can be used in international transactions, international investments and all aspects of the global economy. It is often considered a hard currency or safe-haven currency. The CIA World Fact Book on country wise data on reserves of foreign exchange and gold at the end of 2024 for the stock of all financial assets that are available to the central monetary authority for use in meeting a country’s balance of payments need, reveals that China had the maximum reserve of USD 3.265 trillion followed by Japan with USD 1,16 trillion and India ranked 5th with USD 0.569 trillion reserves.

China’s foreign exchange reserves are primarily held in US dollars, but also include significant holdings in Euro and Japanese Yen. The share of Euro holdings in China’s allocated reserves has increased, reaching 20.06 per cent in 2025Q1. China has gradually reduced its holding of US dollar reserves, down to 25 per cent in 2023 from 59 per cent of its total foreign-exchange in 2016. As of 2024, China reduced its holdings of US Treasury securities to USD 782 billion, which made it the second largest foreign US Treasury holder behind Japan. China also holds a portion of its reserves in gold and Special Drawing Rights (SDRs), a supplementary foreign exchange reserve asset defined by the International Monetary Fund (IMF).

During the last 25 years, after the introduction of Euro in January 1999 by the European Union, the share of the US dollar as a global reserve currency declined (refer to Table 1). In 2024, the USD share in the official global reserve was 57.8 per cent, which was over 71 per cent in 2000. In this period, the share of Euro in the global reserve currency rose from 18 per cent to nearly 20 per cent. Significantly, the share of the Chinese renminbi climbed to 2.18 per cent of the international foreign exchange reserves in 2024.

The latest IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) survey results show that total foreign exchange reserves increased to USD 12.54 trillion in 2025Q1 from USD 12.36 trillion in 2024Q4. The share of US dollar holdings in the allocated reserves decreased marginally to 57.74 per cent from 57.79 per cent in 2024Q4, due to the appreciation of reserve currencies against the US dollar. The share of Euro holdings in the allocated reserves increased to 20.06 per cent from 19.83 per cent in 2024Q4. The share of Chinese renminbi holdings in the allocated reserves decreased to 2.12 per cent from 2.18 per cent in the previous quarter. The share of the other currencies in the allocated reserves (i.e., Yen, Sterling, Canadian dollar, Australian dollar and Swiss franc) amounted to 20.10 per cent in 2025Q1.

Rising Importance of Gold

One of the surest beneficiaries of the dollar’s weakness has been gold. Priced in dollars, the precious metal has tended to move inversely with the dollar’s value. Countries like Turkey, India, China and Brazil have all increased their gold holdings in recent years. Since Russia’s invasion of Ukraine in 2022, Western sanctions have highlighted the risks of holding too many dollar-based assets. It is argued that for many emerging economies, gold serves as a form of geopolitical insurance. Treasury holdings and access to SWIFT can be frozen at any time.

According to the World Gold Council (WGC), official sector gold purchases exceeded 1,000 tonnes in each of the last three years, which is more than double the annual average of the previous decade. Institutions now hold nearly as much gold as they did back in 1965, during the Bretton Woods era. A recent European Central Bank (ECB) report noted that, for the first time ever, gold now represents a larger share of total global foreign exchange reserves (20 per cent) than the euro (16 per cent). A recent survey data from the WGC showed that 95 per cent of central banks expect to increase their gold reserves over the next 12 months.

It is reported that the Central banks are increasingly buying gold from local mines as prices surge. Besides being cheaper, securing gold directly from mines helps support local industry and bolsters reserves without weighing on foreign exchange reserves. Purchasing gold through the international market often requires dollars — a reserve asset. That means central banks must swap one reserve for another. But that won’t be the case if they use local currencies to buy gold from their own backyard. Providing support for domestic mining sectors and respective local communities are also key drivers for central banks purchases via local mines, reports CNBC.

Though the Philippines and Ecuador have been doing this for years, more central banks with access to domestic gold mines are considering direct local purchases. According to the World Gold Council, 19 out of 36 respondents in the World Gold Council’s latest central bank survey said they are buying gold directly from domestic artisanal and small-scale gold miners in local currency. Central banks of Colombia, Tanzania, Ghana, Zambia and Mongolia are relying on domestically mined gold to build up reserves.

Traditionally, central banks acquire gold through the global over-the-counter market — typically cantered in London — where gold is transacted via major bullion banks, priced in US dollars, euros, or sterling. These purchases often involve high-purity London Good Delivery or LGD bars, which meet global trading standards and are stored in top-tier vaults such as those at the Bank of England. Buying domestic mine output saves on banking and intermediary fees, as well as shipping costs. However, countries need to pay for processing and refining the metal to LGD standard — the de facto international benchmark for large gold bullion. Central banks that buy gold bars from local mines and have domestic LGD refining capacity, nullify those additional costs. The Philippines’ central bank, for instance, is a certified LGD refiner. Kazakhstan has two refiners accredited by the London Bullion Market Association.

Challengers to US Dollar Supremacy

The US Dollar Index, when measured against a basket of other major currencies, has declined by approximately 10 per cent this year through mid-June lowest level in three years. In a note to clients in June, UBS stated that the dollar had become “unattractive,” and cautioned about its further decline as the US economy slows. Bloomberg reports that foreign vendors—from Latin America to Asia—are asking US importers to settle invoices in Euros, Pesos and Renminbi to avoid currency swings. This is a far cry from the post-World War II era, when the US dollar was the unquestioned default currency for global transactions.

The US dollar is facing growing resistance from multiple directions – from African revolutionary movements to economic recalibrations in Europe, and from the counterbalance efforts of BRICS nations to the geopolitical entanglements of Ukraine and Israel. De-dollarisation is not a threat to global stability. It is a rebalancing – one that demands fairness and equity. The global south is no longer asking for change, they are enacting it. Countries are simply questioning the rules of a game long rigged in Washington’s favour, writes Kenneth Mohammed in Guardian.

In addition to the traditional global currencies like Euro and Pound sterling, a new set of currencies is challenging the hegemony of the US dollar. Here are a few examples.

In Africa, several sub-regional and continental initiatives have been established to unify its economic space. One notable example is the establishment of the Economic Community of West African States (ECOWAS) in 1975, which aims to create a common market in the West African region. In 2019, ECOWAS leaders adopted the name “ECO” as the single currency for West Africa, but political and economic factors have delayed its implementation.

The goal of a common currency, first in West African Monetary Institute (WAMI)/West African Monetary Zone (WAMZ) countries—the Gambia, Ghana, Guinea-Conakry, Liberia, Nigeria, and Sierra Leone—and later in the whole ECOWAS area, was officially stated in December 2000 in connection with the formal launch of WAMZ. The ‘ECO’ was intended to enhance trade and eliminate trade barriers within the ECOWAS sub-region.

The ECO was first planned to be introduced in 2003, but this was postponed several times. The fifth launch deadline was set for July 2027. The idea was proposed with the hope of creating a currency to rival the Euro and the US dollar, which are globally recognised currencies for trade. ECOWAS is expected to mark its year-long golden jubilee celebration in 2025, with activities beginning in Accra. “The vision is alive. It hasn’t been abandoned. It hasn’t been deserted,” a spokesperson uttered on April 21, 2025. ECO—the potential African currency, shared by west African nations—is not just a financial tool but a symbol of decolonisation.

Though in the 17th BRICS Summit Declaration there was no specific mention of a common BRICS currency, its members are developing central bank digital currencies (CBDCs) to reduce dependency on the US dollar and bypass the SWIFT system. The development of CBDCs among BRICS nations facilitates the potential future integration of a common currency like the R5. In an amazing coincidence, the currencies that all of the core members of BRICS use begin with the letter R—Renminbi, Ruble, Rupee, Real and Rand. With the inclusion of six new member nations, BRICS has strengthened its economic partnership and collective bargaining power.

A technical report, prepared by the BRICS Payments Task Force, outlined ways to enhance interoperability between national financial systems. The initiative intends to strengthen trade and investment between Global South countries, reducing dependence on platforms controlled by Northern powers. The articulation is part of a broader effort, which also includes the use of the New Development Bank (NDB), dubbed the BRICS Bank, as an incubator for new financial tools. The new BRICS payment system, primarily initiated by China and Russia, also known as “BRICS Pay,” is a planned independent and decentralised payment messaging system for BRICS countries to trade with each other in their own currencies, independent of the US dollar. BRICS Pay will create an alternative system to SWIFT, the main global interbank payment network.

China is leading the show with the introduction of its digital yuan. China’s digital yuan, also known as the e-CNY, leads the charge. The digital yuan is a key element in China’s strategy to enhance financial sovereignty, internationalise the yuan, and provide an alternative to cryptocurrencies like Bitcoin. The digital yuan is China’s version of a CBDC, where the People’s

Bank of China (PBOC) directly issues digital currency to individuals. Unlike a wholesale CBDC intended for banks and financial institutions, the digital yuan is a retail CBDC designed for everyday transactions. It is pegged 1:1 with the physical yuan, does not bear interest, and is primarily aimed at replacing cash in China’s economy. The digital yuan differs from cryptocurrencies like Bitcoin. While Bitcoin operates on a decentralised, open-source ledger, the digital yuan is managed by the PBOC on a centralised ledger with closed-source code.

On June 18, 2025, the head of China’s central bank pledged to expand the international use of the digital yuan and called for the development of a multi-polar global currency system, where several currencies dominate the world economy. China will establish an international operation centre for e-CNY in Shanghai. Six foreign banks including Standard Bank and First Abu Dhabi Bank agreed to use China’s Cross-Border Interbank Payment System (CIPS)—the yuan-based international settlement system—in future, a step that further expands the use of yuan in global trade, reports Reuters. According to South China Morning Post, a growing list of African nations have made deals to explore or implement use of the Chinese currency for trade and financial transactions.

However, the most disruptive development that challenges the US dollar is the mainstreaming of cryptocurrency. The founders of cryptocurrency wanted to replace fiat money, i.e. money backed by the government that issues it. It helps oligarchs to evade state regulations including taxes. Currently, cryptocurrencies are hawked by the likes of billionaire Elon Musk. They hold that all capitalism’s problems can be solved by the “free market.” Bitcoin, the first and most popular, has gone from a fringe idea in the 2010s to trading for thousands of dollars. Currently, one Bitcoin is traded at around USD 123000+. Analysts predicted that America’s rising national debt could threaten the dollar’s status as the world’s reserve currency, potentially leading to decentralised assets like Bitcoin taking its place.

On July 17, the lawmakers in the US passed the country’s first major national cryptocurrency legislation. The bill sets up a regulatory regime for so-called stable coins, a kind of cryptocurrency backed by assets seen as reliable, such as the dollar. Known as the Genius Act, the bill is one of three pieces of cryptocurrency legislation advancing in Washington that is backed by President Trump. Some big US banks have announced their plan to launch stable coins after the enactment of crypto-friendly regulation.

Observations

The world is fast moving to a multi-currency system which could lead to an unstable and chaotic monetary situation, as observed before World War II. To avoid that, John Maynard Keynes’ proposal, offered during the Bretton Woods Conference in 1944, for an International Clearing Union (ICU) and the Bancor (an international non-national central bank settlements or reserve currency), may be seriously considered again. His ideas sought to create a balanced global financial system that would promote international trade and prevent economic instability caused by imbalances in trade and payments. Rejection of Keynes’ proposal had created a global monster, in US dollars, that produced an unequal and over exploitative world order, controlled by the USA.

The writer is a professor of Business Administration who primarily writes on political economy, global trade, and sustainable development.
Views expressed are personal