For almost 8 decades after the Second World War, the US solar has been the dominant currency in the global financial system. However, due to an ongoing war may many nations are considering shifting away from the dollar for trade purposes which are leading to uncertainty about the currency’s future dominance. In February 2022, Russia’s invasion of Ukraine resulted in a series of financial sanctions imposed by the US against Moscow. The most significant measures were freezing nearly half of Russia’s foreign currency reserves which amounted to $300 billion and removing major Russian banks from SWIFT, a service that enables international payments between banks. Furthermore, these sanctions which have been described as the “weaponization” of the US dollar have led to Russia as well as China the US’s two main geopolitical competitors to promote their own alternative financial systems.
Moreover, as per analysts, it is unlikely that the US dollar will lose its dominant position in the international financial system in the near future. It will continue to be the primary currency used for international trade and transactions as there is no other currency that can challenge its position. However, if more countries begin trading in other alternative currencies it could reduce the dollar’s grip on the global financial system. Most of the world’s trade occurs in US dollars which became prominent towards the end of World War II. But to understand the reason behind the same it is important to first examine why the dollar became the world’s primary currency in the first place. Following the Second World War the US emerged as the largest economy in the world and the dollar was pegged to gold. Other countries in turn tied their currencies to the dollar which became the dominant currency for international trade and transactions. The system known as the Bretton Woods Agreement remained in place until the early 1970s when the US abandoned the gold standard but the dollar’s dominance continued.
The spark came in the notion with the Russian sanction as to whether the US dollar’s dominant position in the global financial system could be challenged and if so what the implications would be for the US and the world economy. Some experts argue that the Russian sanctions could accelerate the process of dethroning the “King dollar” while others suggest that the Dollars’ dominance is unlikely to change in the near future. Today, the US dollar accounts for approximately 60% of global foreign exchange reserves and more than 80% of international trade is conducted in dollars. The dollar’s dominance has given the US significant economic and political power as well as the ability to impose financial sanctions against countries that don’t comply with its foreign policy objectives.
The Russian sanctions are seen by some as a significant challenge to the dominance of the dollar as they could encourage more countries to explore alternative financial systems. One of the most significant consequences of the Russian sanctions has been the removal of major Russian banks from SWIFT which has made it more difficult for Russia to conduct international trade and transactions. In response, Russia has been developing its own financial messaging system which could eventually challenge SWIFT’s dominance. Additionally, the sanctions have led Russia and China to explore the use of alternative payment systems such as the digital yuan which could eventually reduce their reliance on the dollar. If more countries follow suit and begin trading in alternative currencies it could weaken the dollar’s grip on the global financial system. Furthermore, the US has a deep and liquid financial market which makes it easier for other countries to hold and trade dollars. This gives the US a significant advantage over other countries that may want to challenge the dollar’s dominance.
