The U.S. dollar reigns supreme in the global financial system. It's the currency in which central banks hold most of their reserves, it facilitates countless transactions across borders daily, and it's the standard by which the value of other currencies is often measured. This "dollar dominance" is the result of a long and complex history, encompassing landmark agreements like the Bretton Woods System, pivotal economic and political events, and the sheer size and influence of the U.S. economy. But how did the dollar achieve this status? What are the forces that sustain its dominance, and what challenges could it face in the years ahead? This paper delves into the history of the U.S. dollar, exploring its journey to global preeminence, analyzing the factors that underpin its current position, and examining the potential threats to its continued dominance.
A Brief History of Currencies
Throughout history, societies worldwide have developed currencies to facilitate transactions and simplify economic exchanges. Today, paper money remains the backbone of global commerce, even as credit cards, bank deposits, and online transfers dominate in developed economies. These modern payment methods, however, still rely on fiat currencies issued by governments.
But what is money? At its core, money serves as a medium of exchange, a measure of value, and a store of value. It simplifies trade by eliminating the inefficiencies of barter systems, where goods and services are exchanged directly. Early forms of money included commodities like copper, gold, and silver, which evolved into paper money as societies sought more convenient means of exchange. Over time, paper currencies laid the foundation for sophisticated financial systems.
In the early history of the United States, gold and silver coins served as primary forms of money. During the Civil War, the government issued Demand Notes, United States Notes (commonly known as greenbacks), and Postage Notes (Fractional Currency), all of which were later discontinued. Following the war, Treasury Coin Notes, gold certificates, and silver certificates emerged, and in 1863, the establishment of national banks introduced National Bank Notes. The creation of the Federal Reserve System in 1913 marked a turning point, introducing Federal Reserve Notes, which remain the U.S. dollar we use today.
The various types of notes issued throughout U.S. history had ties to gold or silver, but the U.S. dollar is now fiat money, backed solely by the full faith and credit of the U.S. government. Globally, all major currencies have abandoned commodity backing and are now fiat. While fiat currencies can be effective, they are vulnerable to oversupply, poor monetary policy, and loss of public confidence—factors that have historically led to currency failures.
In the 21st century, the dominance of the U.S. dollar has faced increasing scrutiny. Digital currency advocates, financial analysts, and the public have raised concerns about oversupply, questionable monetary policies, and the potential erosion of confidence in the dollar. Yet, despite such criticisms and periodic challenges, the dollar has retained its position as the world’s dominant currency.
This paper will explore the historical rise of the U.S. dollar, the key factors behind its global dominance, and potential threats to its future role. Topics such as the weaponization of the dollar, the rise of cryptocurrencies, and the growing influence of emerging markets will be examined to understand how these dynamics could shape the currency’s future.
The Bretton Woods System
The Bretton Woods system played a pivotal role in establishing the dominance of the U.S. dollar. Following the end of World War II, the United States emerged as the strongest global power, holding approximately two-thirds of the world’s monetary gold stock1. This economic and geopolitical strength enabled the U.S. to exert significant influence in the creation of the Bretton Woods system, which was established in 1944 to promote global economic stability and cooperation in the postwar era.
Under the Bretton Woods system, participating countries pegged their currencies to the U.S. dollar, which was in turn convertible to gold at a fixed price of $35 per ounce—a continuation of the gold standard. This framework positioned the U.S. dollar as the central reserve currency, widely used for international trade and as an intervention currency to maintain exchange rate pegs. The system also saw the establishment of the International Monetary Fund (IMF), tasked with overseeing exchange rates and providing financial assistance to member countries.
The Bretton Woods system significantly boosted demand for the U.S. dollar, further entrenching its role in global finance. By 1960, the United States accounted for nearly half of the world’s GDP, according to the World Bank, solidifying its economic dominance (see Figure 1). However, the fixed exchange rate regime posed challenges as countries with persistent trade surpluses or deficits struggled to maintain their currency pegs. Foreign exchange interventions became necessary, leading to speculative attacks on currencies perceived as misaligned. The system also constrained monetary policy, as changes in interest rates or money supply could disrupt exchange rates and capital flows in different countries.
Figure 1: Source: World Bank (U.S. Dollars)
Confidence in the dollar’s convertibility to gold began to erode during the 1960s as foreign central banks accumulated increasing amounts of dollars, far exceeding the U.S. gold supply. Concerned about the U.S.’s ability to honor dollar-to-gold conversions, many countries began converting dollars into gold, exacerbating the issue. By 1968, gold outflows had surged, prompting the establishment of a two-tier gold system: an official price of $35 per ounce for central banks and a floating private market price (see Figure 2).
Figure 2: Source: Bureau of Economic Research
The situation worsened in the late 1960s due to rising U.S. inflation driven by fiscal spending on military engagements and domestic programs. Foreign countries became increasingly unwilling to absorb the growing supply of dollars, further straining the system. In 1971, under mounting pressure, President Nixon suspended the dollar’s convertibility to gold, effectively closing the “gold window.” Later that year, the dollar was devalued to $38 per ounce of gold and again in 1973 to $42.22 per ounce. However, by February 1973, the Treasury abandoned the fixed exchange rate, allowing the dollar to float freely.
In October 1976, the U.S. formally removed all ties between the dollar and gold, marking the end of the Bretton Woods system. While its collapse began with the introduction of the two-tier gold system in 1968 and the suspension of gold convertibility in 1971, the framework it created for international trade and economic cooperation persisted. The U.S. economy remained the largest and most influential globally, with a GDP of $1.68 trillion in 1975 (see Figure 3), ensuring the continued dominance of the dollar in international trade. Additionally, the U.S. dollar’s role in oil transactions, often referred to as the “petrodollar system,” further cemented its global supremacy.
Figure 3: Source World Bank (U.S. Dollars)
Petrodollars
Before and after World War II, the United States was the largest oil producer globally. The “Seven Sisters” oil companies—Exxon, Mobil, Texaco, Chevron, Gulf Oil, Royal Dutch Shell, and Anglo-Iranian (British Petroleum)—dominated oil production and distribution. Of these, five were U.S.-based, and two were British, which ensured that most oil sales were conducted in U.S. dollars, with the British pound being the second most commonly used currency in oil transactions.
In the 1950s, large oil reserves were discovered in the Middle East and North Africa (MENA), significantly increasing global oil production. By the late 1950s, this surge in production led to an oversupply of oil, causing a decline in prices. To protect domestic oil producers and prices, the U.S. introduced the Mandatory Oil Import Program, which imposed quotas on oil imports. In response, Saudi Arabia, Iran, Iraq, Venezuela, and Kuwait formed the Organization of the Petroleum Exporting Countries (OPEC) in 1960, marking a shift in power dynamics within the global oil market.
By the early 1970s, OPEC had gained substantial influence over oil pricing. In 1973, OPEC implemented an oil embargo against the U.S. in retaliation for its support of Israel during the Yom Kippur War. The embargo caused severe oil shortages and skyrocketing prices in the U.S., leading to long lines at gas stations. While the oil crisis disrupted the U.S. economy, oil-producing nations in the Middle East reaped significant financial benefits, accumulating vast amounts of U.S. dollars, often referred to as “petrodollars.”
The embargo was lifted in 1974, but despite being lifted, oil prices remained elevated. The rise in oil prices after the embargo was lifted could be attributed to the devaluation of the U.S. dollar following the abandonment of the gold standard. That same year, in 1974, the U.S. entered into an economic cooperation agreement with Saudi Arabia. The agreement aimed to strengthen political ties, support Saudi Arabia’s industrialization and development and ensure the recycling of petrodollars back into the U.S. economy.
Under the agreement, the U.S. committed to assisting Saudi Arabia in achieving its development goals by providing expertise in key sectors such as agriculture, science, and technology. In return, Saudi Arabia agreed to reinvest its petrodollars in the U.S. economy through the purchase of U.S. goods and services, investments, and financing development projects. This arrangement established a framework for economic interdependence, solidifying U.S.-Saudi political ties and contributing to the stabilization of the U.S. economy and currency during the transition from the Bretton Woods system.
As a result of the agreement, Saudi Arabia became a significant holder of U.S. Treasury securities in the 1970s and 1980s. This recycling of petrodollars helped the U.S. maintain its economic dominance by ensuring continued demand for the U.S. dollar, even after the gold standard was abandoned. The petrodollar system thus reinforced the dollar’s status as the world’s primary reserve currency and underpinned the global oil trade.
U.S. Economic Growth and Liquidity of the Dollar
The Bretton Woods and the petrodollar system helped lay the foundation for the U.S. dollar. The U.S. dollar plays a critical role in global capital markets and the world economy today. The dollar is pivotal in foreign exchange (FX) trade volume, SWIFT payments, trade invoicing, official FX reserves, international debt securities, and cross-border loans as shown in Figure 4.
Figure 4. Source: Bank of International Settlements: Revisiting the International Role of the US Dollar by Bafundi Maronoti. As of December 2022
In 2022, global currency exchange trading volume reached $7.5 trillion per day, according to the Bank of International Settlements (BIS). This figure is 30 times greater than daily global GDP2. According to the BIS, the U.S. dollar was one side of 88% of all FX trades in 2022. By comparison, in 2010, global foreign exchange trading volume totaled approximately $4 trillion per day, nearly half the 2022 figure, with the U.S. dollar being one side of 87% of all trades. Remarkably, the share of the U.S. dollar in currency trade has remained relatively stable at around 88% for over two decades.
Several critical factors are often overlooked when assessing the role of the U.S. dollar in the global economy. For instance, approximately half of all debt securities and cross-border loans in global markets are denominated in USD, as shown in Figure 4. Notably, 88% of international debt securities issued in U.S. dollars are issued by entities outside the United States.
Another underappreciated aspect of the U.S. dollar’s dominance is its role as a vehicle currency. Non-U.S. dollar currency pairs are not widely available in global currency markets. As a result, many non-U.S. dollar currencies must first be converted into USD before being exchanged for another non-U.S. dollar currency. These vehicle currency transactions account for an estimated 40% of global currency exchange volume2.
Apart from intra-European trade, dollar invoicing is used in more than three-fourths of global trade, according to Federal Reserve Governor Christopher Waller, despite the United States accounting for only about 20% of global 2022 GDP. This disproportionate use of the dollar in trade further underscores its central role in international finance and commerce, as shown in Figure 4.
In summary, the U.S. dollar’s liquidity, coupled with its widespread use in global debt issuance, trade invoicing, and FX transactions, reinforces its position as the world’s leading reserve and transaction currency.
Rising Powers
Over the past two decades, the Euro has remained the second most traded currency globally, followed by the Japanese Yen and the British Pound. However, the Euro, Yen, and Pound have steadily lost market share as emerging market (EM) economies have expanded. The growth of EM countries has increased the frequency of their currencies being traded, reflecting their larger roles in international markets.
According to the International Monetary Fund (IMF), the combined GDP of emerging market economies was recorded at $45.1 trillion as of April 2023, a significant rise from approximately $8 trillion two decades ago using World Bank data. By comparison, U.S. GDP has grown from approximately $11 trillion to $26 trillion over the same period. The rapid growth of EM economies has naturally translated into a larger market share for their currencies in global foreign exchange (FX) transactions. The accompanying chart below illustrates the increasing share of EM currencies in FX trading over time.
Figure 5. Source: Bank of International Settlements: BIS Quarterly Review December 2022
One standout example of an emerging economic power is China. Twenty years ago, China’s GDP was approximately $1.6 trillion; as of the end of 2023, it has risen to approximately $18 trillion, making it the second-largest economy globally after the U.S. using World Bank data. This economic growth has led to a substantial increase in the trading volume of the Chinese Yuan (CNY). Twenty years ago, the Yuan accounted for less than 1% of global FX trading volume, but it now represents 7%, making it the fifth most traded currency in the world, behind the British Pound2. The chart below highlights the top five most traded currencies and their relative market shares in global FX transactions over time. In descending order, these currencies are the U.S. dollar, Euro, Japanese Yen, British Pound, and Chinese Renminbi (Yuan).
Figure 6. Source: Bank of International Settlements: BIS Quarterly Review December 2022
The dominance of the U.S. dollar in global finance persists despite its share of the global economy being relatively smaller. This outsized role is largely due to the dollar’s extensive use in offshore transactions, which are conducted outside the United States. The widespread use of the U.S. dollar in international finance is a product of its interconnected influence across various regions worldwide. This global influence has, in turn, enabled the dollar to be wielded as a geopolitical tool or economic “weapon” in international trade and diplomacy.
Weaponization of the U.S. Dollar
As the United States remains the largest and most influential economic power globally, it has leveraged its currency and geopolitical influence as tools of power. One of the most impactful methods of this “weaponization” is the use of sanctions. The U.S. can impose sanctions on countries, businesses, or individuals by restricting their access to U.S. dollars and the U.S. financial system. These measures effectively limit their ability to engage in international trade and finance, often crippling their domestic economies.
Iran serves as a prominent example of a country subjected to U.S. sanctions over an extended period dating back to the 80s and 90s. The U.S. government has cited reasons such as supporting international terrorism, human rights abuses, and developing nuclear and missile programs. Sanctions on Iran have ranged from restrictions on arms trade to prohibitions on conducting business with Iran’s energy and financial sectors or certain government officials. Over the past decade, these sanctions have significantly weakened Iran’s GDP and economic stability. Since the U.S. increased the scope of the sanctions on Iran in 2011, GDP has gone from $629 billion to $404 billion as of 2023, according to World Bank data.
Russia has also been a frequent target of U.S. sanctions for a variety of reasons, including malicious cyber activities, election interference, disinformation campaigns, human rights abuses, the use of chemical weapons, weapons proliferation, and actions threatening the security of Ukraine and other nations. The sanctions imposed on Russia encompass companies in the financial, energy, and defense sectors, as well as the Russian central bank, National Wealth Fund, and Ministry of Finance. Sanctions have also targeted Russian oligarchs, elites, and members of the government. Beyond financial restrictions, sanctions include visa restrictions and prohibitions on the operation of Russian aircraft and vessels in specific regions.
Since sanctions were initially imposed in 2014 following an invasion of Ukraine territory, Russia’s GDP remained flat at approximately $2 trillion from 2014 to 2023, reflecting the economic toll of these measures. However, implementing sanctions on globally interconnected nations like Russia poses challenges. For instance, despite sanctions, Russia continues to make energy sales to multiple countries, highlighting the complexities of enforcing these measures in a globalized economy.
The widespread use of sanctions and U.S. dominance over the dollar payment system have prompted countries to collaborate in limiting U.S. power and economic influence. Both China and Russia have expanded their global reach by supporting other governments through economic development, military aid, and investments, aiming to reduce reliance on the dollar. In response to sanctions, Russia has begun invoicing commodity exports in Russian Rubles, Chinese Yuan and Indian Rupees, primarily to BRICS nations, which include Brazil, Russia, India, China, and South Africa. At the October 2024 BRICS Summit, the BRICS nations formally welcomed Egypt, Ethiopia, Iran, and the United Arab Emirates, further expanding their economic and political alliance. The BRICS nations aim to reduce reliance on the U.S. dollar, strengthen energy and natural resource control, and increase global influence. Even the European Union has expressed interest in reducing its reliance on the dollar by developing an independent payment system separate from U.S. oversight and SWIFT.
The weaponization of the U.S. dollar as a political and economic tool adds another layer of complexity to international trade and finance. The increased use of sanctions has motivated affected countries to explore alternatives to the dollar, signaling a potential shift in the global financial landscape. While the dollar remains dominant, these trends highlight the possibility of a more fragmented system in the future as nations seek to reduce their exposure to U.S. influence and economic leverage.
Rise of Digital Currencies
The emergence of digital currencies over the past decade has sparked debates about whether they could eventually replace the U.S. dollar. This is a complex and multifaceted question worth exploring. Broadly, digital currencies can be categorized into three types: fully decentralized cryptocurrencies like Bitcoin, privately managed digital currencies like stablecoins, and central bank digital currencies (CBDCs). While many digital currencies exist, Bitcoin, stablecoins, and CBDCs are the most relevant when examining the role of the U.S. dollar in global financial markets.
Bitcoin is widely regarded as the first truly decentralized cryptocurrency, as it is not controlled by any single entity but rather by a network of users. In today’s financial landscape, Bitcoin is viewed in several ways: as a digital gold, a speculative asset, a hedge against inflation, a store of value, or a high-risk, high-reward investment, depending on the perspective of the observer. You can refer to Canterbury’s white paper named “Investment Consulting Primer to Bitcoin” on Canterbury Consulting’s website to learn more about Bitcoin and its characteristics.
There have been calls suggesting that Bitcoin could one day replace the U.S. dollar, particularly as concerns grow about the U.S. government’s fiscal mismanagement potentially leading to runaway inflation. While this argument holds some merit, Bitcoin faces significant challenges. Its high price volatility makes it impractical as a medium of exchange for day-to-day transactions. Additionally, Bitcoin’s energy-intensive mining and transaction processes raise concerns about environmental sustainability.
Nevertheless, Bitcoin’s decentralized nature makes it an attractive tool for circumventing sanctions imposed by the U.S. or other countries. For instance, Russia has used Bitcoin for foreign transactions to bypass economic sanctions, according to Reuters3. While this highlights Bitcoin’s potential utility, its inherent limitations make it unlikely to replace the U.S. dollar in its current form.
Stablecoins present a more practical alternative to the U.S. dollar compared to Bitcoin. A stablecoin is a type of cryptocurrency designed to maintain a stable value by being pegged to a specific asset or a pool of assets, often the U.S. dollar. Stablecoins are primarily used to facilitate the trading of other digital assets but are also gaining traction as a medium of payment due to their relative price stability. Stablecoins offer several advantages. They can facilitate instant transactions without the need for traditional banking intermediaries, reducing costs and increasing efficiency. They also provide financial inclusion opportunities for individuals without access to traditional banking services.
However, stablecoins come with their own risks. If not properly managed, their value can deviate from the underlying peg, leading to instability. Furthermore, while Bitcoin operates as a decentralized digital asset, stablecoins are centralized and managed by private entities. Despite these distinctions, most stablecoins are pegged to the U.S. dollar, reinforcing its dominant role in the global financial system rather than replacing it.
Among the most significant advancements in digital currencies is the development of central bank digital currencies (CBDCs), such as the digital Yuan. Issued by the People’s Bank of China, the digital Yuan is designed to function as a digital version of China's physical Yuan and is completely centralized and controlled by the Chinese government.
The digital Yuan is designed to facilitate cross-border payments without relying on banking intermediaries, significantly increasing transaction efficiency. By bypassing traditional banking systems, it reduces dependence on global financial networks, particularly the U.S. financial system. This independence diminishes the effectiveness of U.S. sanctions against China, as it limits the leverage the U.S. can exert through its financial infrastructure.
The development of the digital Yuan marks a key milestone in the history of currency innovation. It not only represents a technological leap forward but also signals a potential shift in the balance of financial power by challenging the dominance of the U.S. dollar in global trade and finance.
What is the future outlook for the U.S. dollar?
As highlighted earlier in this paper, the rise of emerging market economies is increasingly challenging the dominance of the U.S. dollar. These economies are gradually reducing their reliance on the dollar and assuming a larger role in international finance. While this trend is expected to continue in the foreseeable future, the critical questions remain: at what pace will this transition occur, and will it follow a linear trajectory?
Some countries, particularly China and Russia, are actively pursuing strategies to reduce their dependence on the U.S. dollar by developing alternative financial systems and increasing ties with other emerging market countries (BRICS). If successful, these efforts could weaken the dollar’s global influence and lead to a more multipolar currency system. For instance, since sanctions were imposed on Russia in 2014, Russia and China have accelerated their economic ties, with Russia increasingly relying on China to bypass U.S. sanctions. While these relationships are likely to strengthen, identifying a common currency for trade among these nations presents challenges. The Chinese Yuan is a plausible candidate, but its adoption outside BRICS countries remains limited.
The U.S.'s ability to leverage the dollar as a geopolitical tool through sanctions has reinforced its short-term dominance but has also incentivized other countries to explore alternatives. Overuse of sanctions risks undermining trust in the dollar and accelerating the development of parallel financial systems. Notably, some European Union nations have discussed creating an alternative to the SWIFT system, a critical component of global banking, in an effort to reduce dependence on the U.S.
The emergence of digital currencies, particularly central bank digital currencies (CBDCs), has the potential to disrupt the existing global financial order and challenge the dollar’s dominance. Major economies such as China are at the forefront of CBDC development, with initiatives like the digital Yuan offering an alternative to the dollar-based system. If the Federal Reserve were to launch a digital dollar, it could further solidify the dollar’s dominance while providing additional tools for monetary control. Although the Federal Reserve has yet to announce formal plans for a CBDC, it continues to explore and research this possibility.
Another concern, not extensively discussed in this paper but central to public discourse, is inflation. The graph below illustrates the declining purchasing power of the dollar since the 1930s. For context, $1 today would have been able to purchase $18 worth of goods 100 years ago in 1924, reflecting a steady erosion of value over time (see Figure 7). This has led many to question the dollar’s effectiveness as a store of value, prompting interest in alternative currencies or assets. Bitcoin and other digital currencies are often cited as potential solutions, but widespread adoption of digital currencies still seems to be a distant prospect.
Figure 7. Source: Bureau of Labor Statistics: Consumer Price Index for ALL Urban Consumers (CPI-U) as of December 31, 2024
Despite these challenges, it is possible that the U.S. dollar will retain its status as the world’s reserve currency and its preeminent role in international finance. The size of the U.S. economy could continue to outpace others, maintaining its ability to influence global economies. The U.S. has historically been a balance of power in the global economy, has implemented sound economic policies, supported growth in multiple nations, remains a leader in innovation, maintains a strong military, and upholds the rule of law with checks and balances that enhance stability. However, that can change at any point in the future. Geopolitical factors, such as the outcomes of future conflicts, could quickly reshape the global financial landscape, with the victor potentially emerging as the dominant economic power.
Sources:
[1] Source: National Bureau of Economic Research: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform by Michael D. Bordo and Barry Eichengreen
[2] Bank of International Settlements: December 2022 Quarterly Review
[3] Reuters: Russia Leans on Cryptocurrencies for oil trade, sources say. By Anna Hirtenstein and Chen Aizhu
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