Liquidity and Stability: A reserve currency needs to be liquid and stable, qualities the U.S. dollar has maintained over the years. This enables nations to hold large reserves for trade and savings.
Global Trade: Many international transactions, especially for commodities like oil, are priced in U.S. dollars, enhancing its demand.
Low Borrowing Costs: The U.S. benefits from lower borrowing costs due to the global demand for safe, dollar-denominated assets.
Geopolitical Leverage: The dollar’s status allows the U.S. considerable influence over global financial systems and institutions.
Weaponizing the Dollar
Sanctions: The U.S. government has used its control over dollar-based transactions to enforce economic sanctions against countries, effectively cutting them off from the global financial system.
Extraterritorial Jurisdiction: The reach of U.S. policy extends beyond its borders; foreign companies that do business in dollars can also be subject to U.S. laws and sanctions.
Financial Surveillance: The centrality of the U.S. dollar in global finance provides the U.S. government with a considerable amount of financial data, which can be used for intelligence and law enforcement.
Soft Power: The desirability of the dollar and the U.S.’ role in international financial institutions like the IMF and World Bank extend its influence in financial diplomacy.
Dedollarization
Economic Diversification: Countries like Russia and China have taken steps to reduce their dependence on the U.S. dollar by diversifying their foreign exchange reserves and settling trade in other currencies.
Bilateral Agreements: Some countries have established currency swap agreements to bypass the U.S. dollar in international trade.
Cryptocurrencies and Digital Currencies: New forms of digital currency like Bitcoin, or proposed state-backed digital currencies, offer an alternative to the traditional banking system, although they come with their own sets of challenges.
Challenges: Dedollarization is a complex and challenging process that could destabilize economies if not managed carefully. A shift away from the U.S. dollar would also need a viable alternative, something no other currency currently offers on the same scale.
Rise of Regional Currencies: Some suggest that the Euro or the Chinese Yuan could emerge as regional reserve currencies, though they currently lack the full set of features that have made the U.S. dollar globally dominant.
