For over 70 years, the U.S. dollar has been the world’s reserve currency, meaning it’s commonly held by central banks around the globe as part of their foreign currency reserves. The global demand for the U.S. dollar has made it a highly desirable currency, thereby inflating its value. This inflated value typically keeps the price of imported goods cheaper and makes interest rates on U.S. federal loans lower, which is crucial for a country where a one percent increase in interest rates on its nearly $36 trillion debt adds $360 billion to the annual budget. Additionally, the dollar’s dominance allows the U.S. to enact crippling sanctions on countries it deems a threat to its national security or a threat to its foreign policy goals. These benefits of a dominant dollar have been instrumental in building the United States’ influence and economy.
Over the last couple of years, and especially after the election of President Donald Trump, the dollar’s unquestionable dominance has begun to waver. Emerging nations, such as China and Russia, are beginning to voice concerns about the financial and geopolitical power of the dollar. Russia has been especially anti-dollar ever since the United States imposed significantly more sanctions on it following its invasion of Ukraine in 2022. China, on the other hand, opposes the U.S. dollar as it is vulnerable to sanctions from the United States if it ever attempts to expand into the South China Sea. Additionally, China detests that they are bound to American monetary policy as they are forced to keep around $800 billion in U.S. treasuries for international trade. In order to combat the dollar’s dominance, China and Russia, along with other nations in the BRICS organization (an economic alliance involving Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran and the UAE), have begun to discuss the creation of a new currency to challenge the U.S. dollar. This new BRICS currency, while unlikely to exist, still underlines the international community’s growing dissatisfaction with the United States’ dominance of the world economy through the dollar.
International competition is not the sole threat to the dollar’s throne. Recently re-elected President Trump has voiced initiatives that could negatively impact the dollar’s position in the world economy. Trump has made revitalizing U.S. manufacturing a key objective in his next four years of presidency. He intends to achieve this primarily through tariffs, which would make U.S. goods more competitive in the domestic market. He also intends to decrease the value of the dollar by lowering interest rates, as decreasing the value of the dollar can give the same result as tariffs for exports. If the value of the dollar decreases, American exports suddenly become cheaper for consumers outside the United States as their local currency will have a more favorable exchange rate. This plan to devalue the dollar threatens its position as the world’s reserve currency because it could trigger a crisis of confidence amongst the international community. Artificially manipulating a currency can cause other nations to worry about its stability. The dollar was originally trusted by central banks as it was pegged to gold, meaning that for every dollar in circulation, there was one dollar worth of gold held by the U.S. government. It is now trusted as it’s backed by the largest economy in the world and a relatively stable government. Changing the dollar’s value through various policies could cause the international community to worry and, therefore, begin to look to other nations for a more stable and trustworthy currency.
Even with all the uncertainty, the dollar is unlikely to drop completely as the world’s reserve currency. A situation involving a slow decline has presented itself as much more likely. Currently, there are no suitable challengers to the dollar. It’s doubtful that BRICS is cohesive enough to put forward a joint currency or to leverage one of the nations’ current currencies into a position of power on the global stage. Additionally, though unstable, the U.S. economy has continued to perform well, and the U.S. government has generally proved to be stable regardless of Trump’s irrational actions.
