The US dollar's role as the world's dominant reserve currency cannot be understated. In fact, it is used in more than 60% of global trade transactions, making it a formidable force in the global financial and economic system. US is the world's largest economy with a share of $25 trillion in the global GDP of over $100 trillions. This, coupled with the fact that the US dollar is backed by the full faith and credit of the US government, gives it a level of stability and confidence that is unprecedented and peerless.
Source: Visual Capitalist
The US dollar's position as the world's reserve currency also gives it significant advantages. Many countries hold US dollars as a reserve currency, which allows them to conduct international trade and finance in US dollars. This gives the US dollar a high level of liquidity, making it easier to use in international transactions. Moreover, because the US dollar is widely accepted and in high demand, it is relatively stable and tends to maintain its value over time.
A quick and useful comparison below:
US Dollar:
Overrepresented compared to economic strength
Accounts for 41.1% of global payments, 88% of global forex transactions, and 41.73% of the SDR currency basket
US economy has a smaller percentage of global GDP
Chinese Yuan:
Underrepresented compared to economic strength
Accounts for just 2.19% of global payments, 3.5% of global forex transactions, and 2.76% of central bank reserves, and 12.28% of the SDR basket
China has the world's second-largest economy but the yuan's global usage remains limited, despite government efforts to promote it.
Source: Statista
The US dollar is the most widely used currency in global trade.
From 1999-2019, the USD accounted for 96% of trade invoicing in the Americas.
In the Asia-Pacific region, the USD accounted for 74% of trade invoicing.
In the rest of the world, the USD accounted for 79% of trade invoicing.
The euro is dominant in Europe.
The point mentioning the under and over representativeness is critical to understand the changing world order and to accept the possibility of this realization that dollar might not be almighty at some point in future - it might be earlier than many think and not as soon as many wish it to be.
The US dollar's dominance in global finance and trade also has geopolitical implications. As the world's reserve currency, the United States has significant influence over the global financial system, allowing it to impose economic sanctions or other measures against countries that do not comply with its policies.
Source: Results from Google Ngram
But before we move ahead let’s just briefly discuss what makes any currency a reserve a currency.
Characteristics of a Reserve Currency?
Widely accepted
Stable value
Liquidity
Issued by a stable and trusted issuer
Easily convertible
Dominant in global trade and finance
Reserves held by central banks
Now some recent developments.
BRICS Call for a New Currency
Recently the famous bloc BRICS (Brazil, Russia, India, China, and South Africa) has called for the establishment of a new currency. They intend to do it in stages with the foundation of setting trade payments in national currencies and later on develop a digital or paper version of the new currency that will be circulated as well. Currently, the BRICS nations comprise 40% of the world's population and contribute to one-fourth of the global GDP. Recently, Iran and Saudi Arabia have formally initiated the process to join the alliance, indicating that its membership is expanding. Additionally, more than 10 other countries, such as Egypt, Algeria, the UAE, Mexico, Argentina, and Nigeria, have expressed interest in becoming a part of the bloc.
The first part is already underway as China and Brazil have declared to conduct bilateral trade in their own currencies excluding dollar from the equation.
What are some other important developments that have added to the winds that are shifting the sands in global economic order:
More than 60% of the trade settlements between Russia and Iran are currently being conducted using the ruble and rial currencies. Additionally, trade between Russia and China increased by 30% in the past year and is expected to reach $200 billion by 2023.
To move away from the US-dominated global financial system, Iran and Russia have agreed to connect their interbank messaging systems, SEPAM and SPFS, and avoid using the SWIFT banking communication and transfer system.
Saudi Aramco has signed a deal with Chinese partners for an oil refinery and petrochemical project in northeastern China, which is expected to start in 2026. This is Aramco's second major refining-petrochemical investment in China and follows their record profit of $161 billion in 2022.
China's efforts in facilitating a deal between Iran and Saudi Arabia have been seen as part of a "changing global order." The two countries have agreed to re-establish diplomatic relations and reopen their embassies within two months, while also affirming the importance of respecting state sovereignty and non-interference in internal affairs.
EU members have joined the Chinese BRI program. They have also seen their exports rise 5 percent more than the countries who have not joined it.
There are many more points that can be added to the list. This chart below is particularly interesting.
The chart says enough about China’s growing clout in the global economic sphere.
What am I trying to get at? The above discussion highlights that the US still holds a blatant advantage in global economic order but that smooth sweeping control has started to become jittery as we can see China, Russia, Iran, KSA, some Latin American countries and many African countries disturbing the frequency of that continuous wave.
Imagine a thread with its starting point in the US and its offshoots covering all other countries. Now imagine one after another the other ends of that thread (placed in the countries) have started to weaken and/or rip off. Many remain, but many have also weakened. The threads are overstretched. It couldn’t go on for always anyways.
I like to mention Christopher Hobson where he very aptly mentions that we are living in the Twilight of Empire. We can see some fragments of the old and some new. Let’s see which one prevails.
Informative article. Dollar issue is getting a lot of background attention these days. Osama's article will get you caught up.