(sublinhados meus)
Top Dollar
Why the Dominance of America’s Currency Is Harder Than Ever to Overturn
The U.S. dollar is the most easily recognized, widely accepted, and ardently desired currency in the world. It is also much reviled for the power it gives the United States over international affairs. Washington wields the dollar as a weapon against its rivals by imposing sanctions and freezing assets. Even U.S. allies chafe at their dependence on the dollar, which exposes their economies and financial systems to the vagaries of U.S. policies. The country’s rivals and allies alike thus want to end the dollar’s dominance. They are eager to promote alternatives, including their own currencies. And the United States is doing all it can to help them.
The U.S. economy is no longer the colossus it once was. Its public debt is gargantuan and rising, and policymaking in Washington is erratic and unpredictable. Persistent threats of debt defaults undercut the perception that U.S. government bonds are safe. Worse still, the bedrock elements of the dollar’s strength—the rule of law, an independent Federal Reserve, a system of checks and balances—have been undermined in recent years by populist politicians who have chipped away at the country’s democratic institutions.
It would be no surprise, then, if the dollar were rapidly losing its power. But in fact the opposite is happening: the trends that would be expected to weaken the dollar, many of them driven by U.S. policy, are only strengthening its global dominance. The dollar remains on top in part because of the U.S. economy’s size and dynamism relative to other major economies. But more than that, although American institutions are fraying, those in other parts of the world are in no better shape, with populism and authoritarianism on the rise. Moreover, economic and geopolitical turmoil serves only to intensify the quest for safe investments, usually leading investors back to the dollar, which remains the most trusted currency. The United States’ financial markets are much larger than those of other countries, making dollar assets easier and cheaper to buy and sell.
Stay informed.
In-depth analysis delivered weekly.
The dollar is not fully immune to shifts in global economic and geopolitical power. But even as the dollar has lost some ground, the gap between it and any putative rival has only grown and shows no signs of stopping. China and India have become major economic powers, but their currencies have not picked up steam outside their countries. Although the global hierarchy of international currencies is shifting, many of these changes are improving the dollar’s relative standing by hurting its rivals even more. Turbulence in the world economy or global affairs—even if triggered or exacerbated by the United States’ own policy blunders—only enhances the dollar’s strength vis-à-vis alternative currencies. Almost nothing could change this any time soon.
WORTH THE RISK
Since the end of World War II, the dollar has been the leading international currency in every respect—as a unit of account, a medium of exchange, and a store of value. Even by conservative estimates, at least half of all international trade is denominated in dollars, far more than in any other currency and much greater than the U.S. share of world trade, which is roughly 11 percent. It is the main invoicing currency and the top payment currency; roughly half of all international payments are settled in dollars. When a Chinese company imports iron ore from Brazil or a Brazilian firm purchases semiconductors from China, those transactions are almost always invoiced and paid for in dollars rather than in Brazilian reais or Chinese renminbi.
The dollar is also the principal global reserve currency; 59 percent of foreign exchange reserves in the world’s central banks are held in dollar-denominated assets, or assets whose face value and prices are all stated in dollars. There’s a reason the share is so large. Foreign exchange reserves act as a central bank’s rainy-day funds. They can be used to pay for imports or prop up the domestic currency when its value falls. Central banks in emerging-market countries have learned that large stocks of foreign exchange reserves help insulate their economies from volatile capital flows, and they try to keep reserves in assets that are safe and liquid. As a result, they buy dollar-denominated assets, which are available in large quantities and are always in demand and can therefore be bought and sold with minimal transaction costs.
And the greenback remains a key funding currency in global debt markets. When firms or governments in developing countries try to raise money in those markets, they are routinely forced to borrow in foreign currencies. This is usually because foreign investors lack confidence in the value of those countries’ domestic currencies and prefer to be repaid in dollars. Even some European companies and banks prefer to raise capital in dollars because the profusion of dollars makes that cheaper and easier. Two-thirds of securities issued by corporations outside their home countries are denominated in dollars.
These preferences reinforce one another. Foreign central banks’ demand for U.S. Treasury securities helps finance U.S. government borrowing, keeping U.S. interest rates relatively low. This in turn incentivizes foreign governments, corporations, and financial institutions to borrow in dollars. The widespread use of dollars in international trade encourages both developing and developed countries to hold reserves in dollars. During the 2008 global financial crisis, even the Bank of England and the European Central Bank borrowed dollars from the U.S. Federal Reserve.
But since that crisis, dollars have become an increasingly risky asset. The United States remains a dynamic and resilient economy, yet gross federal public debt is likely to exceed $35 trillion—roughly 125 percent of annual GDP—by the end of 2024, and Congress shows little inclination to curb spending or raise taxes. No one expects the U.S. government to walk away from its debt obligations. Still, the threat of even short-lived defaults, on top of the sheer and rising magnitude of debt, has caused rating agencies such as S&P and Fitch to downgrade U.S. government bonds.
The dollar is hostage to politics in more ways than one. During former U.S. President Donald Trump’s term in office, the rule of law and the Federal Reserve’s independence—bulwarks of foreign investors’ belief in the stable long-term value of the dollar—took a beating. The U.S. system of checks and balances proved far too fragile and dependent on unwritten norms to maintain these investors’ confidence, prompting them to reevaluate their trust in the dollar and look for alternatives.
Washington has further jeopardized the dollar’s status by barring Iran, North Korea, and Russia from trading in dollars and thereby from accessing the international financial system. Following Russia’s invasion of Ukraine in 2022, the United States even froze Moscow’s foreign exchange reserves held in dollars. Whether or not this move was justified by Russia’s gross violation of international law, it undoubtedly left other central banks wondering whether their own dollar-denominated rainy-day funds would be locked up should their governments run afoul of Washington.
FALSE PROPHETS
But predictions of the dollar’s demise have greatly exaggerated the currency’s weakness—a fact made clear by its remarkable endurance. Analysts have warned for years that the dollar will lose out to other currencies, and yet none of them has displaced it. Consider the euro, whose inauguration in 1999 seemed to herald the end of the dollar’s unrivaled power. The eurozone was, after all, an economic area that stood toe to toe with the United States in terms of economic and financial market size. It had an independent central bank, and its members generally followed the rule of law.
At first, the euro did bite into the dollar’s shares as a payment and reserve currency. By 2009, the euro’s share of global foreign exchange reserves had risen to 28 percent, up from 18 percent in 2000, and the dollar’s share fell by a corresponding amount. But by the end of that year the euro’s progress had stalled. European governments lacked the political will to transform their monetary union into a broader economic and financial union, which would have required them to cede more power to eurozone institutions and exercise greater discipline in their own policies. The 2009 eurozone debt crisis laid bare the economic and political weaknesses of the monetary union. The euro’s share of global foreign exchange reserves eroded and has now fallen below 20 percent.
The Chinese renminbi has followed a similar trajectory. In 2010, Beijing began to actively promote the “internationalization” of its currency. With China’s rising clout in the world economy, this campaign quickly took off. By 2015, about three percent of global payment transactions were being conducted in renminbi—up from essentially zero just five years earlier. Chinese firms issued renminbi-denominated debt in Hong Kong and other financial markets, establishing it as a major currency on track to one day challenge the dollar.
Then the renminbi, too, stalled. China’s economy and stock market hit a rough patch in 2014 and 2015. Capital flight surged, and the currency lost value. Beijing responded by making it harder to take capital out of the country, spooking foreign investors. Since that period, the use of the renminbi in global trade transactions has increased slightly, but only for trade in which China is directly involved. The share of global foreign exchange reserves held in renminbi has stagnated, staying under three percent. And as China’s economy stumbles, with its leader, Xi Jinping, tightening his control and avoiding significant economic reforms, it is unlikely that foreign central banks and investors will trust renminbi-denominated assets.
Other countries have not even come close to challenging the dollar’s status. Economic and geopolitical forces have in recent years boosted some smaller reserve currencies, such as the Australian dollar, the Swedish kroner, and the Indian rupee, as has been observed by the economist Barry Eichengreen. But these currencies are still bit players in global finance, and their gains have come mainly at the expense of traditional reserve currencies such as the euro, the British pound sterling, and the Japanese yen. The dollar remains firmly on its pedestal, well above the fray.
NEW MONEY
Some politicians and analysts have suggested that countries should look beyond fiat currencies and toward gold and even cryptocurrencies such as Bitcoin, which they claim can serve as alternative “safe assets.” Both gold and cryptocurrencies are in scarce supply and therefore should hold value better than traditional currencies, which can be produced in infinite quantities. But scarcity alone does not ensure durable value. Although some central banks have been accumulating gold, its volatile value and the difficulty of converting large amounts of it into usable currency have rendered it largely unviable as a safe asset. And no central bank wants to take risks on cryptocurrencies, which remain entirely speculative.
Perhaps technology will do what governments cannot: undercut the dollar. Bitcoin and other cryptocurrencies have emerged as a libertarian alternative to official currencies issued and managed by central banks. Some governments are embracing digital currencies, as well. China, India, and Japan are already testing digital versions of their official currencies, and a digital euro is in the offing.
But with its highly volatile value, high transaction fees, and limited capacity for handling large volumes of transactions, Bitcoin has proved to be terrible for payments. New cryptocurrencies such as stablecoins, which get their stable value from backing by fiat currency reserves, are becoming more popular in both domestic and cross-border payments. But stablecoins backed by dollars are the only ones getting any real traction. Ironically, they are only making the dollar more prominent as a payment currency.
Fears that the introduction of digital renminbi could turbocharge the Chinese currency’s rise are unfounded. Most international payments are already digital, and the Chinese government has shown no indication of allowing its currency, in any form, to be freely available for use outside its national borders, since doing so would make it harder to control the renminbi’s value in foreign exchange markets. If Beijing did relax such controls, it would need to implement major political reforms—namely, instituting the rule of law and a system of checks and balances among different arms of government—before foreign investors began widely using its currency and investing in it. But such changes are unlikely.
STAYING POWER
Dollar doomsayers still believe the currency is on the brink of decline. They point to the cautionary tale of how quickly the dollar replaced the pound sterling as the dominant reserve currency after World War II. But that situation is not comparable to today’s. The United States has no serious rival that can match the combination of its economic and financial market size. Its institutions have deteriorated, but those of other major economies are in even worse shape.
Other quirks also make drastic changes unlikely. The turmoil unleashed by the global financial crisis led central banks and investors around the world to seek safety in the dollar, further strengthening its position. Foreign investors hold more financial assets in the United States than American investors hold abroad, meaning the United States is a net debtor to the rest of the world. U.S. liabilities to the rest of the world are denominated in dollars, with many foreign investors willing to accept low returns in exchange for the safety of the dollar. American investors, by contrast, have been willing to bet on foreign assets that are mostly denominated in foreign currencies because those assets yield higher returns even if they are riskier. If the world turned away from the dollar and sent its value plummeting relative to other currencies, U.S. assets abroad would be worth more in dollars, since each unit of foreign currency would also be worth more dollars. Conversely, foreigners would take a beating on the value of their dollar-denominated assets when converted back to their home currencies. In other words, a plunge in the value of the dollar would result in a huge financial gift from the rest of the world to the United States.
In light of this scary scenario, countries around the world should surely have reduced their exposure to the “dollar trap.” But they have done just the opposite. From 2014 to the beginning of 2024, U.S. foreign liabilities grew from $30 trillion to more than $51 trillion, while U.S. assets grew from $24 trillion to just $33 trillion. In other words, the United States was a net debtor to the rest of the world to the tune of $6 trillion in 2014—and that amount has tripled over the last decade. The United States now has the rest of the world in an even tighter chokehold.
Another example of how the dollar is waxing, not waning, comes from the determination of the value of Special Drawing Rights, an artificial currency created by the International Monetary Fund (IMF) in 1969 that serves as a supplemental reserve for member countries. From 1999 to 2015, the value of the SDR was tied to that of four major currencies: the dollar, the euro, the British pound sterling, and the Japanese yen, with each currency having a particular weight in determining that value. The weights of the currencies in the SDR “basket” are based on a formula that takes account of a country’s GDP, its share of world trade, and the share of global foreign exchange reserves held in that currency. The weights sum to 100.
In a bow to China’s rising economic power, the IMF added the Chinese renminbi to the SDR basket in 2016. Based on the formula, the renminbi was assigned a weight of 10.9 percent in the basket, a share that would have to come from the shares of the other currencies. But virtually all of it came from the euro, the pound, and the yen; the dollar’s share was barely affected. The euro was the biggest loser, with its share in the basket shrinking from 37 percent to 31 percent.
The IMF adjusts the weights every five years to reflect changes in the variables that go into the formula. The latest revision, which took effect in 2022, bumped up the weight of the renminbi to 12.3 percent as the Chinese economy continued its progress, despite the hit from the COVID-19 pandemic. But once again, the dollar did not suffer. In fact, its weight increased by nearly two percentage points to 43 percent. Again, the other three currencies lost ground, with the euro’s share shrinking to 29 percent.
SAFETY AMID CHAOS
Economic and geopolitical factors are still intensifying central banks’ desires to diversify their foreign exchange reserves. But the reality is that the dollar remains too powerful and too ingrained in the global economy for states to consider switching to other currencies, because their status as payment and reserve currencies has eroded. And the United States boasts an economy that remains larger and more dynamic than that of almost every other country. Even if China were to someday rival the economic might of the United States, it does not have the strong institutional framework needed to compete with Washington.
Washington could overplay its hand, damaging the dollar’s standing. There might be a tipping point at which markets decide that the level and trajectory of U.S. public debt are unsustainable. Fearing a surge in inflation, which helps a government reduce the value of its debt obligations, domestic and foreign investors could dump U.S. Treasury securities. Further damage to American democratic institutions and the independence of the Federal Reserve, both potential outcomes if Trump were to be reelected, would reduce trust in U.S. financial markets and the dollar.
Paradoxically, however, chaos has proved favorable for the dollar. Any economic and geopolitical turmoil, even if unleashed by the United States, tends to lead investors worldwide to search for safety. And U.S. financial markets are the only ones large enough to meet their demands.
Rather than counting on economic and institutional frailties in other countries, U.S. politicians could reinforce the dollar’s dominance simply by playing their cards right. Economic policies that promote growth and financial stability, including through disciplined fiscal policy that reins in government debt, would help. Ensuring the Federal Reserve’s independence and more judicious use of financial sanctions would preserve trust in the dollar.
The story of the dollar is, ultimately, less about the United States’ strength than about the rest of the world’s weaknesses. Until that disparity changes, and seemingly no matter how badly the United States plays its cards, don’t expect the dollar to decline.