Ashraf Engineer
May 31, 2025
EPISODE TRANSCRIPT
Hello and welcome to All Indians Matter. I am Ashraf Engineer.
Not too long ago, US President Donald Trump warned BRICS countries against replacing the dollar as a reserve currency. He threatened 100% tariffs if they did so. He said on social media: “We are going to require a commitment from these seemingly hostile Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs.” While Trump thinks America is for Americans, the dollar by contrast should be for everyone.
The BRICS include Brazil, Russia, India, China and South Africa, and a few others that joined recently. They do not have a common currency, but it has been suggested often over the years.
So, why is the US dollar the world’s reserve currency? What does it mean for the global economy? And what would happen if it lost that position?
SIGNATURE TUNE
A global currency is any that can be freely exchanged for another currency inside or outside the borders of the issuing country. The US dollar is the strongest such currency and is in fact the official currency of several other countries.
How did it get here?
The first documented use of paper currency in the US was in 1690, with colonial notes issued by the Massachusetts Bay Colony. They were used to fund military operations and it wasn’t until 1776 that the first $2 bill was introduced. In 1785, the US officially adopted the dollar sign, with the symbol of the Spanish-American peso as a reference. Centralised printing began in 1869 at the Bureau of Engraving and Printing. Earlier, cash was printed by private firms, believe it or not.
The Federal Reserve, the US’ central bank, was established in 1913 and the dollar as we know it was first printed in 1914. The Federal Reserve was created because of the unreliability of a currency system based on notes issued by individual banks. At the time, most developed countries pegged the value of their currencies to their gold reserves. But, when World War I began in 1914, many countries suspended the gold standard to pay for the war with paper money. This, in turn, devalued their currencies. Britain, however, stuck to the gold standard to maintain the pound’s position as the world’s leading currency. However, for the first time, it needed to borrow money. The US, meanwhile, became the lender of choice for many countries that wanted to buy dollar-denominated bonds.
Britain finally abandoned the gold standard in 1931 and the dollar unofficially replaced the pound as the world’s reserve currency.
Before it entered World War II, the US was the Allies’ main supplier of weapons and other material. Most countries paid in gold, making the US the holder of the world’s largest reserves of the metal. So, with their gold reserves depleted, the countries buying from the US could never return to the gold standard.
To create a system for fair management of foreign exchange, delegates of 44 Allied countries met in Bretton Wood in New Hampshire in 1944. There, it was decided that currencies would no longer be linked to gold but to the US dollar. This came to be known as the Bretton Woods Agreement. With it, the dollar officially became the world’s reserve currency
Central banks became very important; they would fix exchange rates between their currencies and the dollar. In turn, the US would redeem dollars for gold on demand. Central banks maintained a degree of price control over their currencies by buying or selling their currency to regulate supply.
With countries replacing gold reserves with dollars, they needed an instrument to store those dollars. They couldn’t exactly keep those massive amounts in cash. So, they began buying US Treasury securities, which were thought to be safe.
That, then, is how the dollar became the world’s reserve currency.
But why does a reserve currency matter?
Firstly, it helps investors and governments conduct transactions, such as paying for imports, investments, borrowings and also to set prices for commodities like oil.
So, reserve currencies are the foundation of the global financial system. All international prices, contracts and transactions are quoted in terms of the reserve currency’s units. In addition, investors, governments and sovereign wealth funds see it as a safe haven to protect their assets during periods of uncertainty — geopolitical events, such as the Ukraine conflict and the 2008 financial meltdown.
Generally, the dollar is preferred for three reasons:
- One, the US is a strong sovereign nation, backed by a robust economy
- Two, the international community trusts in the stability and standards of its government and institutions
- Three, inertia. It’s very difficult to change a decades-old global finance structure
There would be some nations that could exhibit one or two of these characteristics but none that have all three.
It’s true, however, that the dollar has lost some ground in recent decades. One reason for this is globalisation and the emergence of several new economies. The volume and speed of global financial flows are growing faster than the US economy. So, demand for the dollar can surpass the capacity of the US to satisfy it. As a result, some organisations have shifted to the euro as well as other developed-market currencies such as the yen and the pound. In recent times, there is also a growing volume of transactions conducted in the Chinese yuan.
However, we aren’t going to the see the dollar lose its dominant position anytime soon. For that to happen, it would require widespread global adoption of another currency. Despite a decline in the share of dollar-denominated securities holdings — from 71% in 1999 to 58% in 2022 — the dollar remains the main reserve asset by a distance.
What would it take for the dollar to stop being the reserve currency?
Other countries could further deepen their capital markets, improve institutions and procure currency adoption. But that is a seriously long window and it would be a very gradual change.
In another scenario, technological innovation would outpace payment and regulatory innovation, creating a situation where trust in technology replaces trust in nations. For example, many believe in cryptocurrencies today. There are problems with it but we could have something more robust in the future.
The third scenario would involve severe mismanagement of the US economy that could erode trust in the political system. This is the probably the greatest shock possible to the system.
As you can tell, the underlying sentiment in all three scenarios is trust – or an erosion of it. However, despite the turbulence of recent times, there is still a lot of trust in the dollar and in the institutions behind it. So, de-dollarisation is a very distant possibility.
But let’s go on a flight of fancy. Let’s assume we are living in a world where de-dollarisation has occurred. What would its impact be?
Fundamentally, it would shift the balance of power, reshaping the global economy. The US would feel it the most, with a broad depreciation of its financial assets. Return on equities, for instance, would plummet due to divestment away from US markets. A weak dollar could create inflationary pressure in the US by raising the cost of imported goods and services.
Today, most energy transactions are carried out in dollars but are also being increasingly priced in non-dollar currencies. Russian oil exports, for example, are being bought by buyers in their local currencies. This trend would strengthen.
Central banks would increase their gold holdings to diversify away from a dollar-centric financial system.
On the payments front, the trend of new payments systems facilitating cross-border transactions without the involvement of US banks, would grow and become the norm.
But I want to repeat what I’ve said already: de-dollarisation is not imminent.
Yes, there are changes in global money flows and there is an alternative financial architecture coming up, but there is no imminent de-dollarisation risk. The factors that support the dollar’s dominance are well-entrenched, supported by deep capital markets, predictable legal systems and the US’ economy.
Across the world, people benefit from safe, dollar-denominated assets. Absolutely no other economy – neither Europe, the UK, China nor anyone else – can provide that level of security.
Europe’s capital market is way more fragmented than that of the US. China’s economy is huge, but its political system and tight capital controls are a deterrent.
The dollar is a global currency because US policies and institutions have historically been more reliable than those of other countries. So, when Donald Trump announced sweeping tariffs on other countries, the dollar’s value fell. However, currencies of emerging economies also fell because the higher tariffs hurt their own growth prospects.
The world needs a stable dollar at this point. There are good reasons it is the world’s reserve currency. If at all that changes, there will be many who will cry over it. And not just in the US.
Thank you all for listening. Please visit allindiansmatter.in for more columns and audio podcasts. You can follow me on Twitter at @AshrafEngineer and @AllIndiansCount. Search for the All Indians Matter page on Facebook. On Instagram, the handle is @AllIndiansMatter. Email me at editor@allindiansmatter.in. Catch you again soon.
