The United States dollar (USD) holds a unique and powerful position in the global economy. As the dominant reserve currency for over seven decades, it has shaped international trade, finance, and geopolitical influence. But as global dynamics shift, questions are emerging about whether the dollar can maintain its status – and what might come next.

What Is a Reserve Currency?

A reserve currency is a foreign currency that is held in significant quantities by central banks and financial institutions around the world. It is used for international transactions, investments, and to support a country’s own currency. The most desirable reserve currencies are stable, widely accepted, and backed by a strong economy and financial and political system.

How the Dollar Rose to Dominance

The USD’s rise began with the Bretton Woods Agreement in 1944, when world leaders established a new international monetary system after World War II. Under this system, currencies were pegged to the US dollar, which in turn was convertible to gold. This arrangement made the dollar the central anchor of the global financial system. Even after the gold standard was abandoned in the 1970s, the dollar retained its dominance. The reasons were both structural and strategic:

  1. Economic strength: The US had the world’s largest and most dynamic economy.
  2. Financial markets: Deep and liquid capital markets made owning US assets attractive.
  3. Political stability: Trust in US institutions and rule of law encouraged confidence.
  4. Oil pricing: Most global oil and other key commodity sales were (and still are) denominated in dollars, reinforcing demand.

Today, the dollar accounts for roughly 60% of global foreign exchange reserves, far outpacing the euro (around 20%) and other currencies like the Japanese Yen, British Pound and Chinese Yuan.

Benefits of Dollar Dominance

The dollar’s status as the global reserve currency offers the United States several key advantages:

  1. Lower borrowing costs: High demand for US Treasury securities allows the US government to borrow at lower interest rates. Lower interest on US Treasury securities then translates into lower interest on other types of domestic borrowing.
  2. Global reach: US companies and banks benefit from conducting business in their home currency.
  3. Geopolitical leverage: The US can use its financial system as a tool of foreign policy, such as through sanctions or dollar-denominated trade restrictions.

Challenges and Rising Alternatives

However, the dollar’s position is not unassailable. Several trends have raised questions about its long-term supremacy:

  • Geopolitical tensions: Countries like China and Russia have actively sought to reduce dependence on the dollar, developing alternative payment systems and bilateral currency agreements.
  • US debt levels: America’s rising national debt and periodic political gridlock (e.g., debt ceiling standoffs) may undermine confidence in its fiscal sustainability.
  • Technological disruption: The rise of digital currencies – including central bank digital currencies (CBDCs) – could offer alternative systems that bypass the dollar.
  • Multipolar world: As the global economy becomes more diversified, with emerging markets gaining influence, a single dominant reserve currency may give way to a more multipolar reserve system.

Is De-Dollarisation Real?

Talk of “de-dollarisation” has grown, particularly among countries looking to insulate themselves from US systems and the risks it might bring. Some recent trends include:

  1. Countries trading oil and other commodities in non-dollar currencies.
  2. Central banks diversifying their reserves into gold and other currencies.
  3. Regional trade blocs strengthening local currency settlements.

While these moves are noteworthy, they represent a gradual evolution rather than a sudden revolution. No other currency currently offers the same combination of liquidity, trust, and scale as the US dollar.

How Can Investors Hedge Against These Shifts?

For investors concerned about the long-term implications of a weakening dollar or increased financial instability, diversification is key. Allocating part of a portfolio to non-dollar assets – such as foreign equities, gold, commodities – can provide a hedge against currency risk. Exposure to emerging market bonds or multinational companies with revenues in various currencies can also mitigate concentration in USD-denominated assets. For those with a more conservative risk profile, Treasury Inflation-Protected Securities (TIPS) and short-dated bonds offer protection from inflation and interest rate volatility tied to policy uncertainty. Naturally all this is very relevant for dollar-based investors and, to varying degrees, those that have a base currency that is not the dollar.

Conclusion: Still Strong, but Not Unchallenged

The US dollar remains the world’s dominant reserve currency – but the ground beneath it is slowly shifting. The economic landscape is becoming more multipolar, and technological innovation is reshaping how money moves across borders. While no clear successor has yet emerged, the long-term future of dollar dominance is no longer taken for granted.

For now and the foreseeable future, the dollar endures – not necessarily because it is perfect, but because alternatives remain less compelling. Yet the coming decades may see a more fragmented and competitive global monetary order, with the dollar as one major player rather than the sole anchor.

Written by

Josef Portelli, CFA

Managing Director – ReAPS Asset Management Ltd

The information contained in this article represents the opinion of the contributor and is solely provided for information purposes. It is not to be interpreted as investment advice, or to be used or considered as an offer, or a solicitation to sell / buy or subscribe for any financial instruments and/ or investment services nor to constitute any advice or recommendation with respect to such financial instruments and/ or investment services. This article was issued by ReAPS Asset Management Limited, a subsidiary of APS Bank plc. ReAPS Asset Management Limited (C77747) with registered address at APS Centre, Tower Street, Birkirkara BKR 4012 is regulated by the Malta Financial Services Authority as a UCITS Management Company and to carry out Investment Services activities under the Investment Services Act 1994 and is registered as an Investment Manager under the Retirement Pensions Act.