The 4 forces that will challenge the dominance of the dollar, according to economic researchers

There are a handful of challenges to the dollar’s top status in financial markets, according to researchers from the Brookings Institution.

In a recent note, the think tank pointed to the US dollar’s shifting status in global financial markets, with the use of the greenback declining steadily over the past several decades. While the dollar still dominates central bank reserves and world trade, the currency accounted for 59% of all global reserves at the start of 2024, down from 71% of reserve in 1999, according to estimates from the International Monetary Fund.

The US dollar’s share of global central bank reserves has fallen over the past several decades.

Meanwhile, the share of nontraditional currency reserves has edged higher. Currencies like the Australian dollar, the Swiss franc, and Chinese yuan accounted for 11% of all central bank reserves at the start of this year, up from 2% recorded in 1999, per IMF data.

Nontraditional currencies, like China’s yuan, are accounting for a larger share of global reserves.

That decline has sparked some fear among investors that the dollar could soon be ousted from its top-dog position in financial markets. While most experts say that likely isn’t happening anytime soon, the think tank said the dollar’s dominant status faces key challenges, pointing to four factors in particular.

1. US sanctions

The US began implementing sanctions on Russia and its allies after Moscow began its invasion of Ukraine in 2022. That’s sparked a de-dollarization drive in Russia and other BRICS nations, which have suggested they’re looking to shift away from the dollar as a reaction to Western trade restrictions.

Russia, in particular, has taken steps to heavily de-dollarize its economy, with the nation adopting a yuan-to-ruble exchange rate, proposing a rival currency to the greenback, and reportedly spearheading an alternative payment platform that wouldn’t be reliant on the dollar.

China, which saw its companies hit with secondary sanctions from the US Treasury last week, has also signaled a shift away from the dollar, promoting its yuan as an alternative.

“If the United States is capricious with sanctions, acts unilaterally, and fails to develop a doctrine of economic statecraft, the dollar could be dethroned,” Brookings researchers said, citing comments from US Treasury Secretary Janet Yellen.

2. US debt

The US’s rising debt load could make currency holders more wary of the dollar, especially if there are concerns that the US may not be able to pay back its dues.

While the US debt balance hasn’t yet breached unsustainable levels, the government’s rapid pace of spending has done little to ease markets. Fitch, for instance, downgraded the US credit rating last year, citing a “steady deterioration in standards of governance.”

“Bickering over appropriations, Congress has shut the government down several times. Further political instability could erode investor confidence in the dollar,” the researchers said.

3. Improved payment technology

More advanced payment systems have made it easier to exchange nontraditional currencies. That could weigh on demand for the US dollar, which has traditionally been seen as the most attractive medium of exchange.

“Typically, converting such currencies to dollars, and vice versa, has been easier and cheaper than exchanging them for one another. But China and India, for example, will soon no longer need to exchange their respective currencies for dollars to conduct trade cheaply. Rather, exchanging renminbi for rupees directly will become cheaper. Consequently, the reliance on ‘vehicle currencies,’ particularly the dollar, will decline,” Eswar Prasad, a senior fellow at the Brookings Institution, said in a previous note.

4. Central bank digital currencies

Digital currencies issued by central banks could also make it easier and cheaper to nontraditional currencies. China is developing one such CBDC, and CIPS, China’s Cross-border Interbank payment system, has been “growing rapidly” over the past few years, the think-tank noted.

The Fed has created its own instant payment network, but hasn’t moved to create a CBDC, with Powell suggesting last year that a digital currency would require approval from lawmakers. That means the US risks falling behind other countries, where digital payment tech is rapidly developing, Brookings researchers said.

Still, despite warnings, most currency experts do not believe de-dollarization is a near-term threat to the US or its currency. At the moment, there are no close competitors to the greenback in financial markets — and countries that try to de-dollarize anyway risk a host of economic consequences, like slower growth and lost investment value, one commodities vet told B-17.