80 years of dollar dominance
The US dollar rose to the height of its power post WW2, when the US took up its role as the global leader in economic and political power. Whilst former global powers like Great Britain, Germany, France, and Japan were left recovering from the destruction of war and their high levels of debt, the US became the stable entity to unite the west, and it certainly had the economic means by which to do this. US share of global GDP rose steadily to a height of 40% in 1960, as a result of two decades of a booming manufacturing sector, high military spending, and Keynesian economic principles being used. The Bretton Woods institutions embedded the dollar as the ‘global currency’ in the new globalised economy, with one of the main rules for members being a guarantee of their currency’s convertibility to the dollar within 1% fixed parity rates. The dollar was then pegged to the price of gold, however as the US held two thirds of the world’s gold at this time, this effectively meant countries were pegging their currencies to the dollar. The US continued its policy of promoting western capitalism and preventing the spread of communism throughout the 20th century, which often included aid or loan packages to Europe and Asia, further cementing the dollar as a strong and widely used currency. However, in the 21st century the US is no longer the sole leading power – nations such as China, India, Brazil, and other emerging countries have seen huge levels of growth and a stabilisation of their industries in the world economy. Shifting political climates and a reduction in the warmth towards the policies of the US government means it is no longer the most sought-after ally.
I am going to explore several factors that might contribute to the persistence of the dollar as the world’s reserve currency, however there is also a strong case to be made for a reduction in its hegemony. There is ongoing debate as to whether the renminbi has the potential to take up the dollar’s role, as China’s economy continues to grow at faster rates than that of the US. An international renminbi may prove to pose as a competitor to the strength of the dollar.
Is it here to stay?
The dollar is seen as a symbol of strength, reliability, and prosperity, adopted by many countries whose own currencies have proved to be fatal to their economies. The dollar is the official currency of exchange in 11 foreign nations, with several more utilising it as a quasi-currency of exchange. The renminbi is solely used by the People’s Republic of China, and although this is not necessarily unindicative of the strength of the renminbi, it does highlight the history of reliability the dollar has had. For decades, especially when tied to the price of gold, it remained stable and a useful tool for countries who were struggling with large fluctuations of their currencies. This is to say, I believe attitudes and perception play a large role in economics – the dollar is perceived by many as a safe currency (although in the first half of 2025 it reached a 40 year low), and so people, governments, and corporations will continue to depend on it for their success. This also highlights the inertia there may be in the current trend of de-dollarisation; in 2022, the dollar dominated 88% of foreign exchange trades, aided by the incredibly widespread use of SWIFT (an international payment system). The Index of International Currency Usage, introduced by Federal Reserve economists Carol Bertaut, Bastian Von Beschwitz, and Stephanie Curcuru, evaluates the adoption of major currencies on a global level; the renminbi only accounts for 2.57 (2022 figures), compared to an overwhelming 60.74 for the US dollar. Furthermore, one major aspect that means the dollar is unlikely to be toppled from its top spot as the world’s reserve currency is its role in the commodity world. The dollar earned its name as the ‘petrodollar’ when the dollar was unpegged from the gold standard in 1971 and instead was used as the pricing mechanism for commodities such as crude oil and natural gas. As of 2023, the US is the largest producer of energy globally, ensuring the circulation of the currency even as some countries move away from trading their fuel in dollars
A key factor dampening the internationalisation of the renminbi is the economic policies of the Chinese authorities. Despite following a policy of de-dollarisation, the Chinese authorities have been less effective at promoting the freedom a currency needs to become the world’s reserve currency. The Chinese authorities feel strongly about their ability to control capital flows, and there is not complete freedom of inward and outward investment. Although the politics of the Chinese authorities can be argued to be stable (Xi Jinping has been the President of the Republic of China since 2012) the economy is less so. Overproduction, underconsumption and tight control from the Chinese communist party has meant the economy has suffered in recent years – there are constant and real fears of deflation and a slump in the property sector. This makes China a less safe bet for investors than the US, and the Chinese policy of currency devaluations has often exacerbated trade tensions around the world. Currently, the dollar is by far the preferred currency for foreign exchange reserves and trading, and short of a major shock to the balance of world power, China has several more key steps to take until the rest of the world might value the renminbi more than it does the dollar.
Will the renminbi ever be safe enough?
The renminbi has become more attractive as a reserve currency in the last three decades, following growth in the global south and east, and changing political relations between the US and the rest of the world. The Chinese authorities have made several moves towards a more internationalised renminbi, creating alternatives to the currently dollar dominated financial systems. The Cross-Border Interbank Payment System (CIPS) was developed by China as an alternative and independent payment system to SWIFT, and is accepted by Russia and Brazil, among other countries. China’s relation with Russia is an important factor as well; following the US’ sanctions on Russia and the freezing of its foreign currency reserves (by preventing the use of SWIFT), Russia has sought to reduce its vulnerability to the US government and has turned to China as an ally. China has also created The Shanghai International Energy Exchange (INE), where countries such as Russia, Iran, and Venezuela have commodity contracts solely traded in yuan. Many of these powerful emerging countries are taking advantage of the growth of non-dollar denominated markets, often using their own currencies to trade, and so saving money on their energy. Of the many factors that may lead to a significant rise in the use of the renminbi, I think the emerging markets turning away from the dollar will be the most significant. World Economics has combined 24 countries to represent the emerging market, which accounts for 51% of global GDP, and 66.4% of global GDP growth over the past 10 years. As US politics becomes more polarised, emerging countries are turning to each other for political and economic support – a noteworthy example being the recent meeting between India, Russia, China, and North Korea. As Trump continues to use the economic weight of the US against allies and enemies alike, there is the potential for a considerate reduction in the proportion of global trade and FX reserves that are US dollar.
A turning point for the dollar
Although the renminbi is an extremely important currency, and this debate is exceptionally current as global politics splits the world into the US’s friends and foe, the figures conclude that there is a long way to go until the dollar truly has to compete with the renminbi. It is only the fifth largest reserve currency and only accounted for 7% of global trade transactions in 2022, compared with 88% in dollars. However, we might have seen the height of the dollar’s domination. There has undoubtedly been a reduction in the global use of dollars, and the US has faced both economic and political problems that have only aided China in its pursuit of power within other emerging countries. Looking forward into the rest of the 21st century, it will be some time, and depend on a variety of factors, before there is a significant shift towards a global system relying more on the renminbi.
