The Slow Fade of the Dollar

Why countries are quietly building a world beyond the U.S. dollar

Image 1: U.S. Dollar

For much of modern times, the U.S. dollar has been the backbone of the global economic system. It functions as the primary medium for international transactions, a stable currency for central bank reserves, and a benchmark for commodities like oil and gold. But in recent years, what was once seen as a steady foundation is beginning to show vulnerability. A convergence of factors such as shifting geopolitical alliances, the assertive foreign economic policy of Donald Trump, and technological disruption have sped up a structural evolution in the global monetary order. These shifts point toward an accelerating trend of “de-dollarization”, which, simply put, is a strategic move by countries to reduce their reliance on the dollar for trade, reserves, and financial stability.

The U.S. dollar’s central role in the global economy was originally put into reality in the Bretton Woods Agreement of 1944, which tied global currencies to the dollar, itself convertible to gold. Even after the collapse of that system in the early 1970s, the dollar retained its dominance, largely because of the breadth and liquidity of U.S. capital markets and the global demand for U.S. assets. However, this dominance has not been costless for the rest of the world. The dollar’s role as both a trade and reserve currency has given the United States unique privileges, such as running large fiscal deficits with limited consequence, but also tremendous leverage through the use of sanctions and control over financial infrastructure. As the U.S. increasingly used this leverage in foreign policy, especially through mechanisms like the Office of Foreign Assets Control (OFAC), other nations began to view dollar dependence as a liability. According to the IMF’s COFER database, the dollar’s share of global foreign exchange reserves has declined from 71% in 2001 to approximately 57.8% as of early 2024. While still dominant, this represents the lowest ratio in nearly three decades, and the trend is downward.

Image 2: IMF - Currency Share of FX Reserves

President Trump’s economic platform, both in his first term and now renewed in his second, has intensified global concerns about dollar dependence. It is clear that, by pursuing the "America First" agenda characterized by tariffs, withdrawal from multilateral trade deals, and unilateral sanctions, Trump has effectively undermined the perceived neutrality and predictability of the dollar-based system. The use of tariffs as tools of negotiation became key to U.S. trade policy under Trump. Countries such as China, Mexico, Canada, and even the European Union faced steep duties on steel, aluminum, and manufactured goods. Though intended to reduce the U.S. trade deficit, particularly the goods deficit, which was $1.06 trillion in 2023, the tariffs instead triggered retaliation and added volatility to global markets. Sanctions have been even more consequential. This process is still ongoing to the date of writing this article, as the U.S. negotiates with countries across the globe. During Trump’s first term, the U.S. re-imposed severe sanctions on Iran and expanded sanctions against Russia and Venezuela. Not only did these measures block access to U.S. financial institutions, but they also discouraged international firms from doing business with targeted countries under the threat of secondary sanctions. As reported by the Brookings Institution, this policy accelerated the global search for financial instruments and payment systems not under U.S. jurisdiction.

One of the clearest manifestations of de-dollarization is the development of alternative financial systems. China’s Cross-Border Interbank Payment System (CIPS), for instance, has grown rapidly. In 2023 alone, it processed around 6.61 million transactions totaling RMB 123.06 trillion (approximately $17.1 trillion USD), a year-over-year increase of more than 50%. By early 2025, CIPS had participants across 119 countries. CIPS integrates smoothly with China's digital yuan pilots, potentially enabling seamless international digital settlements without the intermediary function of the dollar. In parallel, Russia’s SPFS (System for Transfer of Financial Messages) has gained prominence since its 2014 inception. Though its reach is narrower than SWIFT, it now includes financial institutions in over 50 countries. The collaboration between Russia and China to link SPFS and CIPS reflects a strategic move to reroute global capital flows, bypassing the financial infrastructure that utilizes the dollar as the primary currency. BRICS countries are also exploring a joint reserve currency to be used for trade within the bloc. While still in exploratory stages, such a development would challenge and potentially rival the dollar in regional trade.

Moving away from the U.S. dollar is not just a political decision; it marks a fundamental change in the way the world continues to function. Central banks worldwide are actively reshaping their reserve portfolios in response to both geopolitical risk and macroeconomic uncertainty. China, with over $3.2 trillion in foreign reserves, reduced its U.S. Treasury holdings by more than 27% between 2022 and 2024. Furthermore, it has shifted toward gold, sovereign bonds from partner countries, and alternative assets like private equity, which is a part of a broader strategy to hedge against U.S. sanctions and financial coercion. This trend is echoed globally as global reserves fell to $12.36 trillion by late 2024, while allocated reserves dropped to $11.47 trillion. Even more worrisome, the dollar’s share within these reserves has continued to decline, suggesting diversification is both widespread and deliberate. Gold purchases by central banks hit record levels in recent years, reflecting its appeal as a neutral, sanction-resistant asset.

Image 3: IMF - Gold Rebound Chart

This reallocation has tangible consequences for U.S. fiscal stability. Declining foreign demand for Treasuries means Washington may face higher borrowing costs. In early 2025, a 30-year bond auction saw primary dealers absorb over 24% of the issuance, the highest share in years, due to weak foreign participation. As the U.S. debt burden grows, this trend could tighten fiscal space and complicate monetary policy. What’s emerging is a shift from reserve management as a purely financial exercise to one increasingly driven by geopolitical considerations. For many central banks, diversifying away from the dollar is now as much about sovereignty and risk management as it is about yield or liquidity.

The decline in dollar usage carries significant and multifaceted strategic implications. Historically, much of the United States’ geopolitical influence has been backed by the centrality of its currency in the global financial infrastructure. The dominance of the dollar allows Washington to enforce sanctions regimes, exert control over international financial flows, and maintain strategic leverage in diplomatic disputes, all through access to or exclusion from dollar-based systems like the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and Clearing House Interbank Payments System (CHIPS). SWIFT serves as a global secure messaging network for transmitting payment instructions among financial institutions, while CHIPS facilitates the settlement of high-value U.S. dollar transactions between banks. Together, they make the most important financial infrastructure systems in the world. As the world moves toward a more fragmented currency approach, these instruments of power show diminishing returns. Financial sanctions, which once held near-universal force, risk becoming less effective as nations develop parallel systems of payment and reserve diversification. Countries like Russia, Iran, and Venezuela, frequent targets of U.S. sanctions, have actively sought out or constructed alternative mechanisms to shield their economies from dollar-based penalties. Even close allies are reconsidering their exposure, wary of being caught in the crosshairs of increasingly unilateral U.S. foreign policy. In a world where economic coercion via the dollar becomes less feasible, Washington’s capacity to shape global outcomes through non-military means may be fundamentally weakened.

At the same time, the dollar's role as a global "safe haven" could erode if investor confidence deteriorates. Mounting political polarization, repeated debt ceiling crises, and a persistently high fiscal deficit risk are undermining perceptions of the U.S. as a stable steward of global capital. Should foreign investors, especially central banks and sovereign wealth funds, continue divesting from U.S. Treasuries and reallocating toward gold, the euro, or other strategic assets, demand for American debt could shrink. This would place upward pressure on yields and increase borrowing costs at a time when the U.S. faces structural fiscal challenges, including an ageing population and elevated entitlement spending.

According to J.P. Morgan, under a scenario of prolonged fiscal gridlock and waning international confidence, U.S. GDP growth could decline due to reduced private investment, higher capital costs, and tighter credit conditions. This drag on growth would not only constrain domestic policy choices but also reduce the attractiveness of the U.S. as a destination for foreign capital. Furthermore, the growing use of non-dollar currencies in international trade may have structural implications for global commodity pricing. If major exporters such as Russia, China, and Gulf states continue shifting to local currencies or a potential BRICS settlement unit for pricing oil, gas, or critical minerals, it could erode one of the dollar's most entrenched functions: as the default currency for global trade. A significant shift away from petrodollar agreements, for instance, could trigger cascading effects on global liquidity, exchange rate stability, and the international demand for U.S. financial instruments. Taken together, these dynamics suggest that de-dollarization is not merely a financial trend but a strategic realignment with profound implications for U.S. influence and stability in the 21st-century global order.

Despite these trends, the dollar is not on the verge of collapse. It remains unrivaled in terms of liquidity, legal enforcement, and institutional depth. Network effects also entrench its usage, and the more the dollar is used, the more useful it becomes. However, the world is moving from a system where the dollar is indispensable to one where it is one option among several. Countries like India are facilitating trade with the UAE in rupees. The euro remains a credible alternative in many regions. Central bank digital currencies (CBDCs), particularly China's e-CNY, as previously explained in one of my articles, are expected to reach broader interoperability standards within the next five years. Events like the World Bank and IMF Spring Meetings now include serious debates on governance reform and currency diversification, with voices from the Global South demanding greater autonomy and representation in global monetary affairs.

The Trump administration's pursuit of economic nationalism and transactional diplomacy has accelerated a decades-long evolution in global finance. While intended to secure U.S. interests, the net effect may be a weakening of American financial influence. De-dollarization is no longer a speculative fringe idea; it is a measured response to an increasingly weaponized dollar. The implications are vast: more volatile global capital markets, reduced efficacy of U.S. sanctions, higher borrowing costs, and perhaps most significantly, a global economy reconfiguring itself along new axes of power. For the United States, preserving the dollar’s role will require more than economic scale – it will demand trust, stability, and renewed leadership in international financial governance.