A global battle over cash will decide who rules the world economy
The US dollar isn’t just for Americans — every country in the world relies on it.
The greenback has been facilitating the flow of money and goods around the world for over a century. Buying or selling oil? Usually done with dollars. Countries issuing government debt? Usually the price of those bonds is in US dollars. For generations, the greenback has been the safe haven for investors when markets crash and systems go haywire. The US even reminded everyone just how influential the buck is when it effectively froze Russia out of the global financial system with sanctions last year.
But if you listen to certain corners of the financial world and internet, the dollar’s reign as the world’s financial instrument of choice could be coming to an end. Motivated by a mix of politics and economics, countries from Israel and France to Russia and China have signaled they’re looking to start doing more business in a currency other than the US dollar. Central banks have also started to tiptoe away from the dollar, with currencies like the Chinese yuan, Japanese yen, and euro taking up a growing portion of global reserves.
These doom-and-gloom scenarios are overblown, financial experts told me, but in classic conspiracy fashion there’s a kernel of truth to the freak out if you look hard enough. The percentage of financial transactions done in US dollars has slipped over the past few decades, and the percentage of countries’ cash reserves that are held in dollars has been sliding.
These shifts, while notable, don’t mean the US dollar’s dominance is going to end anytime soon. There may be changes around the edges, but as the Stanford finance professor Chenzi Xu told me, there’s still no viable alternative to cold, hard American cash.
“What currency would those countries hold instead?” Xu said. “We need something that looks like money, that will act like money. If you don’t hold dollars, there’s no alternative because everything else is too small or subject to the same risks as the dollar but worse.”
While the US dollar won’t be replaced as the world’s reserve currency overnight, a concerted effort to eat into its dominance has the chance to erode the greenback’s place in the world and cause real shifts in the financial system. If America wants to stay on top, the US can’t take the dollar’s status for granted.
The long arm of the dollar
Over the past five centuries, only a handful of countries have issued the bills the world uses to conduct financial transactions — the globe’s reserve currency. Becoming the issuer of the global reserve currency is about trust. Whether it was the Dutch guilder, the French franc, or the British pound sterling, people trusted that the value of that currency — backed by the country’s government — would stay steady enough to be the benchmark for a transaction. Political instability or prolonged economic downturns can chip away at that trust, until one day the currency is supplanted by cash from a country that is more powerful, more economically stable, and therefore more trustworthy.
For the past 102 years, the US has sat atop of the currency heap. And the globalized nature of the world’s economy means the US dollar has achieved a more powerful status than previous reserve currencies. This so-called “exorbitant privilege” places America on top of an asymmetric financial system, grants the US major trade benefits, and mutes the blowback of other nations’ economic fluctuations. This dynamic also means that the Federal Reserve — which is responsible for printing and controlling the supply of US dollars — is closely watched around the globe. The rest of the world pays far more attention to its policy decisions than, say, the European Central Bank or the People’s Bank of China. Ron Temple, the chief market strategist at Lazard, told me that the US dollar achieved this vaunted status thanks to more than a century’s worth of rule of law and stable markets, which helped earn the confidence of investors.
“People in any country around the world can be found with $100 bills tucked away for safety,” he said. “That especially became true after World War II, when the US dominated manufacturing and trade while other countries were still rebuilding after the war. The US was just an economic powerhouse, with robust institutions that could withstand partisanship and conflict.”
Today, nearly 60% of international reserves are held in dollar-denominated assets, according to the International Monetary Fund, and it’s by far the most-used currency for trade. Data from the Bank of International Settlements shows the dollar is involved in about 88% of all international trade transactions. A good litmus test to see exactly how much sway a reserve currency has is to look at what happens during financial crises. And for the past century, investors always rush to assets they can convert to dollars.
Countries like China or Saudi Arabia are doing what they can to “thumb their nose in the direction of the US,” Gregory Brew, an analyst at the consultancy firm Eurasia Group, told me, but until American assets are no longer viewed as the best option in times of catastrophe, the dollar won’t lose its seat at the head of the table anytime soon. Still, given that the country controlling the global reserve currency holds that status of an average of 94 years, history seems to indicate it’s high time for a successor. So while the timeline may be long, talks of de-dollarization are proof that there may be a new movement afoot.
Threats to hegemony
The global economic order as we know it will end with Operation Sandman.
When Operation Sandman is launched, the emerging theory goes, 100 countries from around the world will sell off trillions of dollars worth of US government debt in a coordinated effort to undermine the value of the dollar and break America’s dominance over the world’s economy. The move will be calamitous for America and the global order, but in time, the effort to break the US dollar’s hold on the world will open the door to a new hierarchy of economic superpowers.
If that all sounds a little far-fetched, that’s because discussion of Operation Sandman is mostly confined to chatter on economic and currency conspiracy accounts on Reddit and TikTok. This “mother of all dollar conspiracies,” as one Reddit user called it, would certainly be a momentous start to a new chapter, but there’s little real-world indication that it could come to fruition.
“I think we live in a conspiratorial time,” Eurasia’s Brew said. “There’s an abiding interest in certain online communities in the idea that the global economy — and specifically the world of fiat currency — is teetering on the brink of some kind of systemic collapse.”
Despite the crackpot inclinations of Operation Sandman’s biggest fans, they do get one thing right: There’s clear evidence the world is de-dollarizing.
Stephen Jen, the chief executive of Eurizon SLJ Capital and a former economist at the IMF, caused a stir in economic circles with an April note to clients that declared the “erosion of the dollar’s reserve currency status has accelerated in recent years at an alarming pace.” By Jen’s calculations, the share of global reserves held in dollars saw a sharp decline in 2022, eroding at nearly 10 times the average annual pace of the past two decades. In 2003, the dollar accounted for roughly two-thirds of global reserves, but Jen said his data shows that’s fallen to about 47% — a much lower mark than the IMF’s 60% estimate. Other groups have failed to detect as steep a drop, he told me, because they don’t account for fluctuations in the underlying value of the dollars in central banks’ coffers.
Jen told me that while countries beyond the US are still frequently using dollars, the appetite for the currency has cooled recently. “We’ve seen a sharp decline in global interest in US dollars,” he said. “After 15 years of very gradual declines, we’ve seen a plunge, an absolute plunge in the past year.”
Most shifts away from the dollar can be chalked up to politics. The world is waking up to just how America-centric the financial world has become, Jen explained — a far cry from the multipolar nature of the cultural and political landscape. And the economies in developing countries have grown larger and more sophisticated over the past few decades, which means there are fewer reasons to stay embedded in a financial landscape that hinges on the dollar and the Fed.
“There is a legitimate argument to ask the question of whether other countries should cope with a unipolar currency world,” Jen said. “There’s a disconnect between the two — the financial world and the real world.”
It’s an interesting line of thinking. Why shouldn’t the financial world resemble something closer to the mosaic of cultures, politics, and nations that exists today? Naturally, it’s something other world powers, such as Russia and China, would want. When the US froze hundreds of billions of Moscow’s dollar reserves, it reminded other countries that the buck can indeed be weaponized.
Stanford’s Xu told me that other countries are thinking: “Well, if I end up in Russia’s shoes, where all my dollar assets are unusable, then it makes sense to go back to our own domestic currency.” While it would make every transaction more difficult, Xu added it could “shield you from bigger shocks of not being able to use your savings.”
China, for one, has made a concerted effort to promote its currency — the yuan — for international trade as a way to shield itself during a time of heightened geopolitical tensions with the US. While China’s yuan comprises less than 3% of global reserve currencies, it’s seen its slice of the pie grow at the fastest rate of any currency since 2016. Meanwhile, Saudi Arabia, France, Brazil, India, Pakistan, Bolivia, Iraq, and others have either completed trades using yuan or expressed a willingness to participate in yuan-denominated trade in the future. These make up a tiny fraction of total dollar transactions, but the trend is emerging.
“There’s a very strong political element to this, particularly with US-China relations worsening,” Eurasia’s Brew told me. “From China’s point of view, de-dollarization reduces their exposure to US influence and potential future sanctions. It’s becoming clear the two will compete economically and diplomatically, and the yuan is becoming a political driver for other countries interested in improving their relations with China.”
Meanwhile, BRICS nations — Brazil, Russia, India, China, and South Africa — have indicated that they want to launch a shared currency to directly rival the dollar. “Every night I ask myself why all countries have to base their trade on the dollar,” Brazil’s leftist president Luiz Inácio Lula da Silva said in April. “Why can’t we do trade based on our own currencies?”
There are plenty of other threats to the dollar too: digital currencies, unexpected backlash to US sanctions, even the Fed. Josh Lipsky, the senior director at the Atlantic Council, said that the Fed’s aggressive interest-rate hikes over the past year and a half have widened the gap in exchange rates between many developing nations and the US. As a result, other countries’ debt gets more expensive.
“Other economies have felt the pain from the dollar very acutely,” Lipsky said. “Evidence of de-dollarization is small but growing.”
Small shifts, long ripples
For most people whose financial lives consist of paying bills, buying gas, and getting a mortgage, the idea of de-dollarization may seem a world away. It’s not as if the average American is going to settle a cross-border oil contract or that the grocery store is going to refuse dollars anytime soon. The experts I talked to agreed: Unless you regularly transact at an institutional- or country-level, Americans probably won’t notice the direct effects in their everyday lives.
But for firms that do transact at the institutional level, a weaker buck — one possible consequence of de-dollarization — could gradually crimp demand for dollars and diminish its standing as the go-to currency for big deals.
JPMorgan strategists Alexander Wise and Jan Loeys told clients they only expect marginal de-dollarization over the next decade. If the dollar’s status does wane beyond that, it’s possible US assets could see a hit — lower stocks, higher bond yields, pricier imports. The biggest threat, Wise and Loeys said, is if the US’s geopolitical standing takes a hit.
“De-dollarization per se probably has little impact on growth and inflation, but the adverse events which could catalyze de-dollarization would probably worsen both,” Wise and Loeys wrote in June.
If being the reserve currency is about trust, then any shift away from the US dollar would indicate an erosion of trust in America — its government, its economy, its financial system. The events that would cause that decline in faith would clearly be a negative for both our economy and society. A politically fueled debt default or a sudden divestment from American assets (albeit in a less coordinated fashion than Operation Sandman), would erode that faith — though neither have historical precedent.
The most likely path forward, according to the JPMorgan team, is partial de-dollarization that takes place over several decades, with the Chinese yuan the most likely candidate to cut into the dollar’s share of trade and reserves. But shifting to the yuan would come with a host of new issues, from China’s rules around cash leaving the mainland to the country’s own economic problems. It’s not even clear Beijing wants its currency to take on the reserve role.
To Stanford’s Xu, de-dollarization fears are largely moot given the sheer number of greenbacks sloshing around the global financial system. It’s estimated that half of all international loans and trade invoices are denominated in dollars, and the more companies and governments that use dollars as their benchmark, the more that liquidity deepens. For de-dollarization to happen, a very large stockpile of safe, low-risk debt backed by another currency would have to materialize, and Xu said that would probably require a crisis-level scenario where everyone dumps their dollars all at once. And, again, the odds of either happening remain slim.
“Having the reserve currency is unambiguously a good thing for the US,” Xu said. “Part of maintaining that does require having some amount of goodwill in the world, and if the US can do that, it’s going to keep providing safe assets for the international economy.”
The panic is overdone, but the trend is real
It’s easy to scoff at conspiracies on Reddit, but there is truth behind the whispers of de-dollarization. It is real, and it is happening — but at a far slower clip than the recent headlines may suggest.
Rather than shrugging it off entirely, however, America’s leaders — from Congress to the Fed — should take all of the talk as a reminder not to take the coveted status for granted. Fooling around with Fed policy, threatening to default on US debt, or hastily imposing financial sanctions, Lazard’s Temple said, isn’t doing America any favors. A century of having the top currency shouldn’t lead anyone to believe we’ll have a century longer.
“We should always recognize we get tremendous benefits from maintaining the dollar’s status,” Temple said. “I don’t think anything is permanent, and other countries could be ready to use something other than the dollar at some point. The ‘exorbitant privilege’ that we’ve had for decades is not a birthright.”
Phil Rosen is a senior reporter for Insider covering markets and the economy.
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