From over last few months, we need to evaluate what is the reason that mainstream people talking about the de-dollarisation. But one must understand the emergence or root of the de-dollarisation lies in the several factors unlike only confidence. The untrust of the greenback does not start overnight. But the lack of confidence displays the factors of untrust.
History: Unipolar Dominance of Dollar
1. 1931: 1st Collapse of the Gold-Exchange System
- The gold standard work as monetary system where price of currency is fixed with the gold standard. The entire system was based on that gold reserve was sufficient. After the world war I , countries had been in the massive budget deficit, and which lead to increase in public debt. Also government expand the money supply but the pace of supply ware more then the gold supply. Which create mismatch between money claim and gold backing.
- After Great Depression in Britain, in 1931 it had suspend the gold standard and it had been also followed USA in 1932 and there were collapse of gold standard worldwide.
2. The Bretton Woods System 1944- 1971
- After World War II, countries created a new monetary system to ensure stability. The Bretton Woods system required countries to guarantee convertibility of their currencies into U.S. dollars with the dollar convertible to gold bullion for foreign governments and central banks.
- he US dollar was fixed to gold at $35 per ounce and other countries fixed their currencies to the dollar. US $ become the global reserve currency for the international transactions. Hence the dollar was treated as good as Gold.
- The factors such as the demand for the dollar increased rapidly, U.S unable to handle excessive gold outflow, larger budget deficit in Vietnam War led to running fiscal deficit and liabilities held abroad. The countries demand gold due to the loss of the confidence and system became unsustainable.
- On August 15, 1971, President Richard M. Nixon announced his New Economic Policy, a program “to create a new prosperity without war.” Known colloquially as the “Nixon shock,” the initiative marked the beginning of the end for the Bretton Woods system of fixed exchange rates established at the end of World War II. After the Nixion Shock, the dollar becomes the fiat currency where value is dependent on the trust, US government creditability, federal reserve policy and not backed by the gold or silver.
However, one question remain – Does it necessary to have the one global reserve currency?
- Insurance against global crises: The world and international investors demand for safe and liquid asset who has mean-variance preference. These investors seek “safe asset” to insure themselves against the bad state of the world. Because most of countries have limited commitment and cannot guarantee they will repay the debt during the crises. Then the world depends on the hegemon to provide the asset that will remain stable even during the disaster.
- Liquidity and smooth international payments: Reserve assets are valuable not only because they are safe, but also because they are highly liquid. They can be easily used for trade, payments, and financial transactions across borders. When many countries use the same currency, it becomes even more efficient due to network effects—the more widely it is used, the more useful it becomes. This is why the global system naturally gravitates toward one dominant currency.
- Preventing global recessions: A key insight is that a shortage of safe reserve assets can itself cause economic downturns. In systems where interest rates cannot fall freely—such as under the gold standard or when rates are stuck near zero i.e. Zero Lower Bound. Let understand – in the recession, country increase the flow of supply by the reduction of the interest rate as monetary policy. But when the interest rate becomes zero, monetary policy becomes defunct as excessive money flow does not create major investment and spending. At that time a steady supply of reserve assets helps prevent such recessionary pressures.
The demand for the reserve currency flow from the gold – gold backed currency – Bretton Woods System – The Dollar fiat currency -?
Before answering this question let first discuss current scenario of the reserve currency.
- For decades, the U.S. dollar has reigned as the world’s primary reserve currency, a cornerstone of global finance. Debates about its potential decline are common, yet they often overlook the true source of systemic vulnerability. The paradox is that the very system designed to provide global financial safety is itself fundamentally unsafe.
- In 2022, the greenback dominated 88% of traded FX volumes — close to record highs — while the Chinese yuan (CNY) made up just 7%, according to data from the Bank for International Settlements (BIS).
- The “Exorbitant Privilege” is Really an “Exorbitant Fragility”
- The classic Triffin Dilemma, first identified in the 1960s, posits a fundamental contradiction: the world needs an ever-increasing supply of the reserve currency for trade and savings, but the more of it that is issued, the less confidence the world has in its value. This ability to borrow cheaply was once dubbed an “exorbitant privilege.” A more modern view recasts this privilege as a profound fragility.
- The U.S. effectively acts as a “world banker,” providing safe, liquid liabilities (akin to bank deposits) to the rest of the world, while it invests in riskier, higher-return global assets. This rigorous model shows that this banking activity is inherently unstable and susceptible to self-fulfilling “bank runs.” Just like a commercial bank, the world’s banker can face a sudden crisis of confidence where global investors panic and liquidate their holdings, triggering a collapse.
- This fragility is more dangerous than a run on a private bank, as there is no global lender of last resort with the fiscal capacity to bail out a hegemon the size of the United States.
- The World’s Banker Might Gamble Too Much, Not Too Little
- A common assumption is that a monopolist enjoying an “exorbitant privilege” would restrict the supply of its product—safe assets—to maximize its profit. The model demonstrates that the opposite can be true: the reserve issuer might issue too much debt from a global welfare perspective.
- This counter-intuitive outcome arises from a misalignment of incentives. As the world’s banker, the reserve issuer gains all the rewards from issuing more debt while not fully internalizing the catastrophic losses a crisis would impose on its “depositors”—the rest of the world.
- More Reserve Currencies Could Mean More Chaos, Not Stability
- It is a popular view that a multipolar world—with the Euro, Renminbi, and others sharing reserve status with the dollar—would create a more stable system. This may be a dangerous misconception. Drawing on warnings first made by economist Ragnar Nurkse in the 1940s, the model formalizes how a system with a few powerful competitors (an “oligopoly”) can create new and potent instabilities.
- This instability arises from worsening “coordination problems.” When investors have several credible reserve currencies to choose from, they can rapidly switch their holdings from one to another at the first sign of perceived instability, triggering the very crisis they fear. The historical precedent is the period of destabilizing flights between the British pound and the U.S. dollar in the 1920s. Data from key central banks in 1928 shows that monetary reserves were split almost evenly between them (52% in pounds and 47% in dollars), a dynamic that ended with the system’s collapse in the early 1930s.
- The Real Danger Signal Isn’t Net Debt—It’s Gross Debt
- Discussions about a country’s financial vulnerability often focus on its net international investment position—its foreign assets minus its foreign liabilities. The model makes clear that this is the wrong metric to watch.
- The crucial indicator of vulnerability is the gross external debt position. This figure is the key to understanding the fragility of the “world banker.” A country’s net position can look healthy, but if its assets are illiquid (long-term foreign direct investment) while its liabilities are liquid (Treasury bills that can be sold in an instant), it faces a classic banker’s mismatch. Gross debt represents the total “deposits” that could be withdrawn at a moment’s notice. For the United States, this number is staggering: its external debt currently stands at 158% of its GDP, with 85% denominated in dollars. This is the scale of the liabilities that are subject to a sudden loss of confidence.
Signals of De-Dollarization or alternate currency
De-Dollarization Meaning: The concept of de-dollarization relates to changes in the structural demand for the dollar that would relate to its status as a reserve currency. This encompasses areas that relate to the longer-term use of the dollar, such as transactional dominance in FX volumes or commodities trade, denomination of liabilities and share in central bank FX reserves.
- Loss of confidence: Adverse domestic developments in the United States pose a meaningful risk to the dollar’s reserve-currency status. Rising political polarization and policy uncertainty can weaken confidence in U.S. governance, which underpins the dollar’s role as a global safe haven. In addition, the continued use of trade barriers and tariffs may prompt investors to reassess the reliability of U.S. assets, gradually eroding structural demand for the greenback.
- Emerging Market Development: The second factor involves positive developments outside the U.S. that boost the credibility of alternative currencies.
- Increase in the price of Gold and other alternate currency: The gold price and the bitcoin price have been surged to skyrocket. Also central bank constantly relies on the gold then the dollar as FX reserve from last few years.
- Commodity markets: De-dollarization is most visible in commodity markets, where a large and growing proportion of energy is being priced in non-dollar-denominated contracts like oil trading in local currency.
Tortoise’s pace
- De-dollarization is not a process that can occur overnight or be driven unilaterally by a handful of countries. For any currency to meaningfully challenge the dominance of the U.S. dollar, the issuing country must emerge as a comprehensive superpower—with economic scale, military strength, geopolitical influence, and deep, credible financial markets. Reserve-currency status is built over decades through institutional trust, market depth, and the demonstrated ability to provide safety and liquidity during global crises. In the foreseeable future, barring an extraordinary geopolitical or economic shock, the United States is unlikely to relinquish its position as the world’s leading monetary power.
- That said, the force of the dollar can be gradually diluted, even if it is not displaced. Emerging economies such as China, India, Brazil, and others—along with initiatives like BRICS—are incrementally reducing marginal dependence on the dollar through local-currency trade, alternative payment systems, reserve diversification, and greater use of gold. These shifts do not signal the end of dollar dominance, but they do point toward a more fragmented and multipolar financial landscape in which the dollar remains central, yet less exclusive.