The Dominance of the Dollar in the Global Economy and the Possibility of Moving Beyond It

The United States has wielded unprecedented influence over the global economy through the dominance of the U.S. dollar. A large share of international trade transactions and central bank reserves are conducted in dollars. This supremacy allows the U.S. to exert significant control over other countries with minimal domestic consequences. However, the emergence of cryptocurrencies presents a potential threat to this dominance. Cryptocurrencies like Bitcoin and central bank digital currencies (CBDCs) may gradually offer alternatives to the dollar. If countries can develop blockchain-based financial systems and conduct international transactions using digital currencies, the dollar’s dominance could be challenged. Yet, until these digital currencies gain broad acceptance and stability, the dollar is likely to retain its central role.

As the global reserve currency, the U.S. Federal Reserve can print money without immediate concerns about domestic inflation. While printing more dollars can reduce the currency’s value, the burden of devaluation is largely absorbed by other countries. The depreciation of the dollar also weakens the purchasing power of other currencies. Although excessive money printing can cause domestic inflation, a significant portion of that inflation is exported abroad. For example, when the U.S. expands its money supply to counter an economic crisis, nations holding dollar reserves see the value of their assets decline. This raises the import costs for dollar-dependent countries, contributing to inflation in their economies. Developing countries with limited reserves are hit the hardest, as they are often forced to weaken their own currencies to obtain more dollars.

During the 2008 financial crisis and the COVID-19 pandemic, the U.S. implemented expansive monetary policies, injecting massive amounts of dollars into the market. This contributed to a rise in prices of dollar-denominated commodities like oil and raw materials. Moreover, interest rate hikes by the Federal Reserve—aimed at controlling domestic inflation—tend to trigger capital outflows from other countries to the U.S., depreciating their currencies and causing financial crises. Notable examples include Argentina and Turkey, which both experienced severe economic instability in recent years.

The U.S. can also accumulate massive debt with relatively little consequence, as other countries continue purchasing U.S. Treasury bonds. While this contributes to America’s budget deficit, the global financial system bears the brunt of the impact. For example, by 2023, U.S. national debt had exceeded $31 trillion. Countries holding large portions of their foreign reserves in U.S. bonds suffer financial losses when the dollar weakens. Additionally, the flood of U.S. liquidity in global markets destabilizes exchange rates and increases financial risk in countries with high external debt.

Dollar dominance also enables the U.S. to finance its vast military expenditures through borrowing and bond issuance. As the dollar is considered a safe-haven asset, foreign governments and institutions continue to invest in it. This allows the U.S. to sustain its military budget without needing to raise domestic taxes. The Federal Reserve occasionally increases liquidity and purchases government bonds, but much of the funding comes from foreign capital attracted through deficit financing. Furthermore, many countries are compelled to use dollars for arms purchases and military transactions, indirectly strengthening the U.S. military-industrial complex.

In essence, because other countries depend on the dollar, the U.S. can issue bonds and attract foreign investment to fund its military. Nations holding large dollar reserves inadvertently finance U.S. military power.

Moreover, the U.S. leverages dollar dominance to impose economic sanctions on countries that defy its policies. Given the global financial system’s reliance on the dollar, sanctioned states are often excluded from platforms like SWIFT, crippling their international trade. Some countries have made efforts to reduce their dollar dependency—such as bilateral trade agreements in local currencies (e.g., China and Russia), the development of alternative payment systems like CIPS, and increasing gold reserves. However, substantial challenges remain in displacing the dollar.

A major obstacle is that most international debts are denominated in dollars, and replacing the dollar would require strong, liquid, and widely accepted alternatives. Currencies like the euro, yuan, and others still lack the global liquidity and trust that the dollar commands. The dollar remains the primary reserve currency due to its relative stability.

Clearly, if a significant number of countries decide to abandon the dollar in trade, the U.S. would face serious consequences. Reduced demand for the dollar would lower its value and weaken U.S. economic influence. America would no longer be able to use the dollar as an economic weapon. Simultaneously, a decline in foreign purchases of U.S. bonds would raise interest rates, increasing the cost of debt financing for the U.S. government.