The waning reign of the US dollar

https://arab.news/yzv93
Since the close of the Second World War, the US dollar has been the fulcrum of the international financial system. It anchors commodities markets, undergirds central bank reserves, facilitates global trade and remains the preferred currency for cross-border investment. Yet, amid tectonic shifts in geopolitics, digital innovation and domestic instability in the US itself, the contours of a new monetary order are beginning to emerge — one that could eventually eclipse the greenback's singular dominance.
The dollar's position remains formidable, but no longer unassailable. It still accounts for nearly 59 percent of global foreign exchange reserves, according to International Monetary Fund data, and features in close to 90 percent of foreign exchange transactions. But the trend line is downward: in 1999, the dollar represented 71 percent of central bank reserves. More recently, data from the IMF's COFER survey shows a steady uptick in holdings of nontraditional currencies — from 6 percent in 2007 to nearly 10 percent in 2023 — including the Chinese renminbi, Canadian dollar and Korean won.
This gradual shift is being driven not only by market dynamics, but also by politics. The strategic use of the dollar as a tool of foreign policy — via sanctions, SWIFT exclusions and asset freezes — has created incentives for major economies to explore alternatives. The freezing of more than $300 billion of Russia's central bank reserves in 2022 made explicit what many had long suspected: dollar dependency entails geopolitical risk. China, India, Brazil and others have since accelerated efforts to settle bilateral trade in their own currencies and deepen nondollar payment infrastructure.
And yet, no clear successor has emerged. The euro, while accounting for about 20 percent of global reserves, continues to be constrained by the eurozone's institutional fragmentation and lack of fiscal union. The renminbi, although bolstered by Beijing's trading heft and the People's Bank of China's growing footprint, remains tightly managed and capital-controlled — conditions anathema to reserve currency status. Other currencies such as the yen, franc or sterling are liquid but lack scale. Cryptocurrencies, meanwhile, have proven to be more speculative asset than reliable store of value.
More serious long-term challengers may emerge in the form of central bank digital currencies. China's e-CNY is the most advanced pilot among major economies, already tested in 25 cities and used in transactions exceeding 100 billion yuan. Cross-border central bank digital currency trials are underway with other Asian and Gulf states. The objective is clear: to build a credible, scalable mechanism for trade settlement outside the dollarized system — particularly for energy, metals and strategic goods.
The strategic use of the dollar as a tool of foreign policy has created incentives for major economies to explore alternatives.
Dr. John Sfakianakis
Still, the core criteria that underpin reserve status — deep, open capital markets; legal predictability; political stability; and a credible central bank — remain unmatched in the US. However, even these foundations are showing signs of strain. US federal debt now exceeds $36 trillion, with debt servicing costs projected to rise above defense spending by the end of the decade. Foreign ownership of US Treasurys has declined as a share of total debt and China's holdings have fallen below $775 billion, down from a peak of $1.3 trillion in 2013.
Crucially, the evolving political climate in the US has introduced a new layer of institutional uncertainty. Increasingly, fiscal brinkmanship, unpredictable shifts in foreign and trade policy, and overt challenges to the independence of key institutions have begun to weigh on international perceptions. Allies have grown more circumspect; adversaries more assertive. The prospect of renewed political volatility in Washington — marked by a less predictable approach to global engagement — risks eroding long-held assumptions about the stability and stewardship of the US-led financial order.
At the same time, Europe — often seen as the most viable democratic counterweight — faces its own constraints. The euro, while the second-most held reserve currency, remains hemmed in by the structural limitations of the EU project: a monetary union without full fiscal integration, fragmented sovereign debt markets and diverging economic trajectories between core and peripheral members. Germany's fiscal conservatism, France's political volatility and Italy's chronic debt overhang continue to test the eurozone's cohesion. Without deeper institutional convergence and greater political will, it is difficult to envisage the euro evolving from a regional reserve currency into a true global alternative.
History offers precedent. In the early 20th century, sterling held sway over global finance, backed by the vast reach of the British Empire and the primacy of the City of London. But post-1945, the UK's shrinking industrial base, rising debt and imperial retreat catalyzed a prolonged loss of confidence. Sterling's share of reserves declined gradually — from over 40 percent in the 1940s to under 5 percent by the 1980s. The transition was not sudden but terminal.
Other contenders have emerged over the decades but failed to displace the dollar's supremacy. The Deutsche mark gained traction in the 1980s as West Germany's economic and monetary orthodoxy attracted foreign capital. The Japanese yen appeared poised to ascend in the early 1990s on the back of Japan's export dominance, but its rise was undercut by demographic stagnation, banking crises and policy deflation.
The Swiss franc, while highly stable and liquid, remains limited by the modest size of Switzerland's economy and capital markets. Each case illustrates a critical truth: global currency status is not simply a function of economic strength, but of systemic openness, institutional scale and geopolitical alignment.
The US dollar is not poised for imminent collapse, nor is a single currency waiting in the wings to usurp it. But the emergence of a multipolar currency world is increasingly plausible — one in which the dollar still leads but coexists with regional reserve currencies and digital platforms with partial global reach. This evolution would bring more exchange rate volatility, transactional complexity and geopolitical arbitrage to the international system.
The dollar's centrality has long been underwritten by more than economics: it has been embedded in the architecture of the American-led global order. As that order fragments, so too will the financial structures that support it. For governments, investors and corporates alike, this does not mean abandoning the dollar — but it does mean preparing for a future in which its dominance is no longer a given.

Try Our AI Features

Explore what Daily8 AI can do for you:

Learn with AIFact CheckingText to SpeechAI Summary

Related Articles

Al Arabiya

an hour ago

• Al Arabiya

How Senate Republicans Want to Change the Tax Breaks in Trump's Big Bill

House and Senate Republicans are taking slightly different approaches to the tax cuts they want to include in their massive tax and spending cuts bill. Republicans in the two chambers disagree on the size of a deduction for state and local taxes. They also disagree on issues such as allowing people to use their health savings accounts to help pay for their gym memberships and whether electric vehicle and hybrid owners should pay an annual fee. The House passed its version shortly before Memorial Day. Now the Senate is looking to pass its version. While the two bills are similar on the major tax provisions, how they work out their differences in the coming weeks will determine how quickly they can finalize a bill. President Donald Trump is pushing to have the legislation on his desk by July 4. Here's a look at some of the key differences between the two bills: Tax break for families: The child tax credit currently stands at $2,000 per child. The House bill temporarily boosts it to $2,500 for the 2025 through 2028 tax years –– roughly the length of President Donald Trump's second term. It also indexes the credit amount for inflation beginning in 2027. The Senate bill provides a smaller initial bump-up to $2,200, but the bump is permanent, with the credit amount indexed for inflation beginning next year. Trump campaign promises: Trump promised during the campaign that he would seek to end income taxes on tips, overtime, and Social Security benefits. He also said he would give car buyers a new tax break by allowing them to deduct the interest paid on auto loans. The House and Senate bills incorporate those promises with temporary deductions lasting from the 2025 through 2028 tax years, but with some differences. The House bill creates a deduction on tips for those working in jobs that have customarily received tips. The House also provides for a deduction for overtime that's equal to the amount of overtime a worker has earned. The Senate bill comes with more restrictions. The deduction for tips is limited to $25,000 per taxpayer, and the deduction for overtime is limited to $12,500 per taxpayer. The House and Senate bills both provide a deduction of up to $10,000 for interest paid on loans for vehicles made in the US. And on Social Security, the bills don't directly touch the program. Instead, they grant a larger tax deduction for Americans age 65 and older. The House sets the deduction at $4,000. The Senate sets it at $6,000. Both chambers include income limits over which the new deductions begin to phase out. More SALT: The caps on state and local tax deductions (known in Washington as the SALT cap) now stand at $10,000. The House bill, in a bid to win over Republicans from New York, California, and New Jersey, lifts the cap to $40,000 per household with incomes of less than $500,000. The credit phases down for households earning more than $500,000. The Senate bill keeps the cap at $10,000. That's a non-starter in the House, but Republicans in the two chambers will look to negotiate a final number in the coming weeks that both sides can accept. Medicaid providers: The House bill prohibits states from establishing new provider taxes or increasing existing taxes. These are taxes that Medicaid providers, such as hospitals, pay to help states finance their share of Medicaid costs. In turn, the taxes allow states to receive increased federal matching funds while generally holding providers harmless through higher reimbursements that offset the taxes paid. Such taxes are now effectively capped at six percent. The Senate looks to gradually lower that threshold for states that have expanded their Medicaid populations under the Affordable Care Act (or Obamacare) until it reaches 3.5 percent in 2031, with exceptions for nursing homes and intermediate care facilities. Industry groups have warned that limiting the ability of states to tax providers may lead to some states making significant cuts to their Medicaid programs as they make up for the lost revenue in other ways. The Medicaid provision could be a flashpoint in the coming House and Senate negotiations. Sen. Josh Hawley, R-Mo., was highly critical of the proposed Senate changes. 'This needs a lot of work. It's really concerning, and I'm really surprised by it,' he said. 'Rural hospitals are going to be in bad shape.' Tax breaks for business: The House bill would allow companies for five years to fully deduct equipment purchases and domestic research and development expenses. The Senate bill includes no sunset, making the tax breaks permanent, which was a key priority of powerful trade groups such as the US Chamber of Commerce. Clean energy tax credits: Republicans in both chambers are looking to scale back the clean energy tax credits enacted through then-President Joe Biden's climate law. It aimed to boost the nation's transition away from planet-warming greenhouse gas emissions toward renewable energy, such as wind and solar power. Under the Senate bill, the tax credits for clean energy and home energy efficiency would still be phased out, but less quickly than under the House bill. Still, advocacy groups fear that the final measure will threaten hundreds of thousands of jobs and drive up household energy costs. Odds and ends: The House bill would allow millions of Americans to use their health savings accounts to pay for gym memberships, with a cap of $500 for single taxpayers and $1,000 for joint filers. The Senate bill doesn't include such a provision. The House reinstates a charitable deduction for non-itemizers of $150 per taxpayer. The Senate bill increases that deduction for donations to $1,000 per taxpayer. Republicans in the House bill included a new annual fee of $250 for electric vehicle owners and $100 for hybrid owners, which would be collected by state motor vehicle departments. The Senate bill excludes the proposed fees.

Al Arabiya

9 hours ago

• Al Arabiya

Michael Waltrip Joins Ownership Group of AF1's Nashville Kats

Two-time Daytona 500 winner Michael Waltrip has joined the ownership group of the Nashville Kats, a founding franchise of the Arena Football 1 league. The Kats announced Waltrip joining the group Friday, along with his craft beer company, Michael Waltrip Brewing. The ownership group already includes former NFL coach Jon Gruden, with Jeff Fisher, a former coach of the Los Angeles Rams and Tennessee Titans, majority owner. 'We now have three living legends attached to the Nashville Kats – Jeff Fisher, Jon Gruden and Michael Waltrip – all with the ultimate goal to win championships and raise the AF1 to its ultimate potential along with any team associated with the AF1,' said Bobby DeVoursney, the Kats' CEO and managing partner. Waltrip's brewery is now the team's official craft beer. The team also plans a Waltrip Winners Circle fan zone for the upcoming season. The Kats play the Southwest Kansas Storm on Sunday in Clarksville in the AF1 semifinals.

Al Arabiya

10 hours ago

• Al Arabiya

Supreme Court Rejects Toy Company's Push for a Quick Decision on Trump's Tariffs

The Supreme Court on Friday rejected an appeal from an Illinois toy company pushing for a quick decision on the legality of President Donald Trump's tariffs. Learning Resources Inc. had asked the justices to take up the case soon rather than let it continue to play out in lower courts. The company argues the tariffs and uncertainty are having a massive impact on businesses around the country and the issue needs swift attention from the nation's highest court. The justices didn't explain their reasoning in the brief order rebuffing the appeal, but the Supreme Court is typically reluctant to take up cases before lower courts have decided. The company argues that the Republican president illegally imposed tariffs under an emergency powers law, bypassing Congress. It won an early victory in a lower court, but the order is on hold as an appeals court considers a similar ruling putting a broader block on Trump's tariffs. The appeals court has allowed Trump to continue collecting tariffs under the emergency powers law ahead of arguments set for late July. The Trump administration has defended the tariffs by arguing that the emergency powers law gives the president the authority to regulate imports during national emergencies and that the country's longtime trade deficit qualifies as a national emergency.