7.3.6 US dollar dominance

Helpful prior knowledge and learning objectives

Helpful prior learning:

Section 1.1.1 The economy and you, which explains what an economy is and how it is relevant to students’ lives
Section 1.1.2 The embedded economy, which explains the relationship between the economy and society and Earth’s systems
Section 1.3.9 Power in the economy, which explains where power comes from and how it shapes economic relationships
Section 7.1.1 Global exchange as a system, which describes global exchange as a system with parts, relationships, functions and emergence
Section 7.1.2 History of global exchanges, which describes how global exchange systems have evolved over time, shaped by changes in technology, power, and environmental factors
Section 7.1.3 What moves across borders? which describes what flows across borders and explains how visible global flows are linked to less visible social and ecological effects
Section 7.2.1 Why do countries trade and restrict trade? which describes different forms of protectionism and explains arguments for and against freer trade
Section 7.2.2 Currency exchange, which explains what exchange rates are, identifies the factors that cause them to change, and analyses who gains and who loses when exchange rates move
Section 7.2.4 Balance of payments, which distinguishes between the current account and the financial and capital accounts and discusses what a persistent pattern in the balance of payments reveals about the conditions in an economy
Section 7.2.5 Who writes the rules of global exchange? which explain who shapes the rules of global exchange and how various sources of power influence which rules are written and whose interests they reflect
Section S.1 What are systems?, which explains what a system is, the importance of systems boundaries, the difference between open and closed systems, and the importance of systems thinking
Section S.2 Systems thinking patterns, which outlines the core components of systems thinking: distinctions (thing/other), systems (part/whole), relationships (action/reaction), and perspectives (point/view)

Learning objectives:

explain how US dollar dominance shapes the global financial system, and is leveraged in global exchanges

In April 2023, the President of Brazil, Luiz Inácio Lula da Silva, stood before a crowd in Shanghai and asked a simple question. ‘Every evening, I ask myself why all countries must base their trade on the [US] dollar. Who decided it should be the dollar?’

This section explains how the US dollar came to hold such a dominant position in global exchange and how this dominance creates inequalities and risk in global exchanges.

Figure 1. The US dollar dominates global trade, but this dominance is being questioned.

(Credit: Mariusz Blach, licensed via Adobe Stock)

How did the US dollar become so powerful?

The story begins at the end of the Second World War (Section 7.1.2). Two world wars and a global depression had left the world's global exchange system in crisis, and countries needed a stable way to trade and lend to each other.

In 1944, representatives from 44 countries met in a small town in the United States called Bretton Woods to design a new system. Europe and Asia were devastated by the war. The United States was the largest economy in the world, held most of the world's gold, and had lent money to many other countries during the war. It was in a strong position to set the rules of the new international financial system.

Figure 2. The Bretton Woods negotiations, July 1944.

(Credit: Federal Reserve History)

The agreement the countries reached in Bretton Woods made the US dollar the anchor, or central reference point, of global trade and finance. Other countries fixed the value of their own currencies to the dollar. The dollar itself was fixed to gold at a rate of 35 dollars per ounce. Countries held dollars in their central banks as a reserve currency. A reserve currency is a currency that other countries hold in large amounts to manage their own exchange rate and to cover gaps when they owe more to the rest of the world than they earn.

For the US dollar to work as a reserve currency, dollars had to be available outside the United States for other countries to hold. Only the US could create dollars, so the rest of the world could only get them if the US sent dollars out, mainly by spending more abroad than it earned from the rest of the world, running a current account deficit (Section 7.2.4). Central banks receiving these dollars held them as reserves, backed by the US promise to exchange them for gold on demand. This meant dollars kept flowing out through trade and the stock of dollars held abroad, and the corresponding claim on US gold, kept growing.

For two decades, the system worked. But in 1960, economist Robert Triffin pointed out where this was heading. The more dollars accumulated abroad, the more people would eventually doubt that the US could really exchange them all for gold. Yet if the US stopped running a current account deficit to slow this growth in US dollars abroad, the world would run short of dollars to trade with. The system was set up in a way that made its own collapse likely. This problem is now known as the Triffin Dilemma.

By the late 1960s, this doubt had turned into a crisis. The US was spending heavily on the Vietnam War and building up large debts. Several states began demanding gold in exchange for their dollars. In August 1971, US President Richard Nixon announced that the US would no longer exchange dollars for gold. The system agreed at Bretton Woods ended, but the US dollar continued its global dominance.

How does US dollar dominance shape power and inequality between countries?

Today, over half of all foreign currency reserves held by central banks around the world are in US dollars. Almost 90% of all currency exchange transactions worldwide involve the US dollar as one of the currencies being traded (Figure 3). Large amounts of international trade, particularly in oil and other commodities, are priced in dollars, even when the United States is not part of the trade at all.

Graph showing the percentage of transactions and holdings in US dollars

Figure 3. The US dollar dominantes foreign exchange transactions and reserves, debt issuance, trade invoicing, and SWIFT payments.

(Credit: Positive Money)

How dollar dominance benefits the United States

This dominant position gives the United States an important advantage. Central banks and investors around the world hold large amounts of dollars, so they need a safe place to keep them. US government bonds are the most widely used option. Investors can buy and sell them easily, in huge quantities, at almost any time. This demand for US government debt is one reason the US can borrow money at lower interest rates than most other countries pay. Trust in the US to repay what it borrows is another reason. Economists sometimes call this advantage the exorbitant privilege. It lets the US borrow cheaply and consistently spend more on imports than it earns on exports.

Not everyone in the US sees this as a benefit. Some economists and policymakers argue that persistent current account deficits have contributed to the decline of US manufacturing. This debate shapes US trade policy today (Section 7.2.4).

How dollar dominance disadvantages other countries

This same dominant position gives the United States significant power over the rest of the world. Decisions made in the United States can have major consequences for other countries. This power takes several forms:

sanctions: Because so many international payments pass through the dollar system at some point, the US can block specific countries, banks, or individuals from using it. This is called imposing sanctions. This gives the US the power to restrict a country's access to international trade and finance without needing agreement from other countries. Russia and Iran, for example, have faced sanctions that cut them off from large parts of the global financial system. The same power can also be used against countries whose policies the US opposes, even when other states disagree with that decision.

swap lines: In a financial crisis, countries often need US dollars urgently, for example to pay for imports or to repay debts owed in US dollars. If banks cannot get enough dollars, a currency can lose value quickly, deepening the crisis. To prevent this, the US Federal Reserve can lend dollars directly to other central banks, through arrangements called swap lines, which those central banks then supply to their own banking systems. In 2008 and again in 2020, swap lines helped prevent a collapse of global financial markets. But the Federal Reserve decides which countries receive this support. Access has usually been limited to a small group of close allies, including the eurozone, the United Kingdom, and Japan, while most countries in the Global South have been excluded. Even close allies depend on the US being willing to offer this support, which has been questioned recently as geopolitical tensions increase.

exchange rate risk: The US does not need to consider other countries when it makes economic decisions at home, such as changing interest rates (Section 7.2.2), but those decisions still affect the value of the dollar worldwide. Countries that rely on the dollar feel the effects of decisions made in the United States through:

export earnings: Commodity prices are set in dollars globally, so when the dollar rises or falls in value, it directly affects how much money countries earn from their exports;
debt repayment: Many countries borrow money internationally in dollars. When their own currency loses value against the dollar, the real cost of repaying those debts rises sharply. In serious cases, countries cannot repay, a situation called a default.

tied-up resources: Because the value of their own currencies and economies can be affected by decisions made in the United States, countries often keep large US dollar reserves to protect themselves during financial crises. This provides financial security, but it also means tying up resources that might otherwise support domestic development.

Can US dollar dominance be ended?

The idea of a global system that doesn't depend on any single country's currency is not new. At the original Bretton Woods talks in 1944, economist John Maynard Keynes proposed a shared international currency, called the bancor, that no single country would control. His proposal was rejected in favour of the dollar-based system, partly because the US held the most economic power at the time.

Many countries have asked whether a different system is possible. The BRICS group of countries, which includes Brazil, Russia, India, China, and South Africa along with several newer members, has discussed creating alternatives to the dollar for trade and reserves (Figure 4). Some countries have signed agreements to trade with each other in their own currencies rather than dollars. China has also developed its own international payments network, called CIPS, which allows cross-border transactions to be settled in Chinese yuan rather than dollars, reducing dependence on the US-dominated financial system.

Figure 4. Map of full BRICS members.

(Credit: BRICS)

However, progress has been slow. At the BRICS summit in Rio de Janeiro in July 2025, no agreement was reached on a shared currency or a joint plan to reduce dependence on the dollar. The dollar's position rests on the size and openness of US financial markets, which no other country or group of countries currently matches.

The US government has also made clear it will resist change. In 2024 and 2025, US President Donald Trump threatened very high tariffs on BRICS countries that pursued alternatives to the dollar. These threats caused several member states to step back from earlier proposals.

Other proposals return to Keynes's original idea. The 2026 Global Justice Report, produced by an international team of economists, proposes creating a new international currency, issued by a new global institution rather than any single country, to reduce the imbalances and inequalities created by dollar dominance. It has not been adopted, but it shows that the search for an alternative to the dollar continues. These ideas, and other approaches being explored by countries in the Global South, will be taken up again in Subtopic 7.4.

Activity 7.3.6

Concept: Systems, power

Skills: Thinking skills (transfer, critical thinking)

Time: varies, depending on option

Type: Individual, pairs, or small group

Option 1: Considering the concept of power in US dollar dominance

Time: 20 minutes

Section 1.3.9 explained that power is the ability to influence decisions, actions, or outcomes that affect others. In economics, power usually comes from one of three sources, or a combination of them:

control of resources: having something others need or depend on, such as money, technology, or access to a payment system
rules and institutions: the ability to set or benefit from laws, agreements, or systems that decide what others can and cannot do
ideas and norms: shaping what people see as normal, fair, or the only realistic option

Power can also become self-reinforcing over time. When one source of power helps someone gain more of another source of power, this can create a reinforcing feedback loop, where advantages keep building on themselves. This pattern is sometimes called the success-to-the-successful system trap (Section S.9). An early advantage leads to more advantages, making the gap harder to close over time.

One way to limit this is through countervailing power, where power that is used to balance or limit the power of a stronger group. Trade unions balancing the power of employers is one example.

For each of the four ways dollar dominance affects other countries (sanctions, swap lines, exchange rate risk, tied-up resources), identify which source or sources of power it comes from. Use one or two sentences to explain your answer for each.
Using the idea of a reinforcing feedback loop, explain in a short paragraph how the history of the dollar, from Bretton Woods to today, might be an example of this pattern.
Groups like BRICS can be seen as an attempt to build countervailing power against the reinforcing loop that keeps the dollar dominant. Using what you've read in this section, explain why building countervailing power against an established reinforcing loop might be difficult, even when many countries want change.

Click on the arrow to see sample responses, but give it a go yourself or with a partner first!

1. Sources of power

Sanctions: mainly control of resources. The US can restrict access to the dollar payment system, which most countries depend on for trade and finance.
Swap lines: control of resources. The US Federal Reserve controls who receives emergency dollar lending in a crisis.
Exchange rate risk: mainly rules and institutions. Because of how the global financial system is structured, US decisions apply worldwide, without the US needing to consider the effects on other countries.
Tied-up resources: control of resources. Countries depend on the dollar for trade and financial stability, so they must hold large dollar reserves to protect themselves. This is a consequence of that dependency, rather than the US actively exercising power in a single action, but the underlying source of power is the same as with sanctions and swap lines: control over a resource the rest of the world needs.

Some answers may combine categories, for example, arguing that sanctions also involve rules and institutions, since they are enforced through US financial regulation. The real world is complex and messy, so these sources of power are often intermingled.

2. The dollar and reinforcing loops

After Bretton Woods, the dollar became the main currency other countries held and used for trade. This gave the US deep, liquid financial markets, since so many dollars needed a safe place to be invested. These deep markets made it easier and cheaper for the US to borrow, which made US assets even more attractive to hold, which meant more countries kept using dollars. Each step made the dollar more central to the system, making it harder for any other currency to compete, even after the direct link to gold ended in 1971.

3. Countervailing power against dollar dominance

Building countervailing power is difficult once a reinforcing loop is well established. Most countries already hold large dollar reserves, price trade in dollars, and have debts in dollars, so switching away is costly and risky for any single country to do alone. This creates a coordination problem. Even if many countries want change, they need to act together to make an alternative viable, and BRICS includes countries with very different interests and priorities. The US also actively resists change, for example, by threatening tariffs on countries that pursue alternatives to the dollar. Together, these barriers make it hard to build countervailing power strong enough to shift a system that has been reinforcing itself for decades.

Ideas for longer activities and projects are listed in Subtopic 7.5

Checking for understanding

Further exploration

The Global Justice Report - This 2026 report from the World Inequality Lab proposes a new global currency and financial system to reduce inequality between countries. Chapter 3 explains how dollar dominance transfers wealth from poorer to richer countries, and sets out a plan for a new international currency, building on ideas first proposed by Keynes in 1943. Difficulty level: high
Positive Money, a UK-based NGO, has a short explainer series that unpacks why the US dollar holds such a central role in global trade and finance, who benefits from that arrangement, and what alternatives countries are exploring. It builds on the ideas in Section 7.3.5 about financial infrastructure chokepoints, going into more depth on the dollar specifically, which links to this section.
- Dollar Dominance in 60 seconds - A one-minute video overview of what dollar dominance means, a quick way in before the fuller series below. Difficulty level: easy
- Dollar dominance: Explained - Introduces what 'dollar dominance' means and how it developed, tracing it back to the Bretton Woods system after the Second World War. Includes the video Global trade is unfair. Here's one reason why. Difficulty level: medium
- Dollar dominance: The impacts - Looks at what dollar dominance means for the Global South specifically, including how it can deepen financial vulnerability, with Sri Lanka's 2022 debt default as an example. Difficulty level: medium
- Dollar dominance: The future? - Explores what a move away from dollar dominance could look like, including new payment systems and central bank digital currencies being developed by groups of countries. Difficulty level: medium
- Beyond Dollar Dominance: New money and payment systems for a multipolar world - A longer, more detailed report behind the series, on alternative financial infrastructure for Global South countries. Likely too dense for most students at this level, but worth including for stronger or older readers. Difficulty level: high
GeoEconomics Center Dollar Dominance Monitor – A research hub from the Atlantic Council. It tracks the US dollar's role as the world's main reserve currency, and efforts by countries such as China and Russia to rely on it less. This connects to Russia's invasion of Ukraine, since the G7's use of financial sanctions against Russia is one of the main forces now pushing other countries to build alternative payment systems. Difficulty level: high.

Sources

Bini Smaghi, L. (2011, October 3). The Triffin dilemma revisited [Speech]. European Central Bank. https://www.ecb.europa.eu/press/key/date/2011/html/sp111003.en.html

Board of Governors of the Federal Reserve System. (2025, July 18). The international role of the US dollar: 2025 edition [FEDS Notes]. https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-s-dollar-2025-edition-20250718.html

Chancel, L., Dietrich, J., Mohren, C., Moshrif, R., Odersky, M., Piketty, T., Somanchi, A., et al. (2026). The Global Justice Report: A plan for equality & prosperity within planetary boundaries. World Inequality Lab. https://globaljusticeproject.wid.world

Cross-Border Interbank Payment System. (2025). Introduction to CIPS. People's Bank of China. https://www.cips.com.cn/en/about_us/about_cips/introduction/index.html

International Monetary Fund. (2026, March 27). IMF data brief: Currency composition of official foreign exchange reserves [Data brief]. IMF Data. https://data.imf.org/en/news/imf%20data%20brief%20march%2027

Jakovljević, A. (2025, April 2). The liberal world order and de-dollarization: Can BRICS offer a stable alternative? Center for International Relations and Sustainable Development. https://www.cirsd.org/en/young-contributors/the-liberal-world-order-and-de-dollarization-can-brics-offer-a-stable-alternative

Kaufmann, S. (2025). How the international reserve currency system works – and whether the end of dollar hegemony is imminent. Exploring Economics. https://www.exploring-economics.org/en/discover/how-the-international-reserve-currency-system-works/

Kazi, D., & Haglund, A. (2024). Beyond dollar dominance: New money and payment systems for a multipolar world. Positive Money. https://positivemoney.org/beyond-dollar-dominance

Triffin, R. (1960). Gold and the dollar crisis: The future of convertibility. Yale University Press.

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