Jamie Carey
For decades, the United States has enjoyed a remarkable advantage in the global economy: the dominance of the United States dollar (USD) as the world’s reserve currency. That status has given Washington extraordinary financial flexibility. Because the dollar sits at the centre of the global financial system, the United States has been able to borrow vast sums, run persistent fiscal deficits, and sustain a higher debt-to-GDP ratio than most advanced economies. Demand for dollar-denominated assets has also allowed the US government to borrow at lower interest rates than many of its peers.
THE DOLLAR’S DOMINANCE IS NO LONGER QUITE AS UNCONTESTED AS IT ONCE WAS
Much of this advantage stems from the role the dollar plays across the international system. The USD remains the most widely used currency in global trade, financial markets, and foreign-exchange reserves. Governments around the world hold large quantities of dollar assets, particularly US Treasury bonds, as a safe store of value. This constant demand creates a stable market for US government debt and reinforces the central role of the American economy as the backbone of the global financial system.
Yet the dollar’s dominance is no longer quite as uncontested as it once was. Over the past two decades, the share of global foreign-exchange reserves held in US dollars has gradually declined. Around 2000, roughly 71 per cent of global reserves were held in dollars. Today, that figure sits closer to approximately 55–57 per cent. This shift has not resulted from a single rival currency replacing the dollar. Instead, central banks have slowly diversified their holdings into currencies such as the euro, the Japanese yen, and, to a much smaller extent, China’s yuan.
For now, the change remains gradual rather than revolutionary. The dollar still dominates international finance, and no alternative currency currently possesses the combination of deep financial markets, institutional stability, and global trust required to replace it. Nevertheless, the trend raises important questions about the long-term durability of American financial power. If the dollar’s share of global reserves continues to decline over the coming decades, the United States could gradually lose some of the economic advantages associated with reserve-currency status. In practical terms, that could mean higher borrowing costs for the US government, greater constraints on deficit spending, and increased pressure to manage fiscal policy more carefully.
DESPITE PRESIDENT TRUMP’S WAR GOAL OSTENSIBLY BEING REGIME CHANGE, HE HAS SUCCEEDED IN NOTHING BUT UNNECESSARILY RAISING INFLATION AND KEY GLOBAL PRICES
Beyond economics, the dollar’s global role also underpins American geopolitical influence. Because so much of the world economy operates through dollar-denominated systems, from international banking to energy trading, the United States possesses significant leverage over global finance. Sanctions, payment restrictions, and financial regulations often carry global weight precisely because the dollar remains the backbone of the international monetary system. In this sense, monetary dominance has long functioned as a form of soft power, binding much of the world economy to institutions influenced by Washington.
Recent geopolitical developments, however, have raised questions about whether that system may be entering a period of greater instability. The ongoing conflict involving Iran has injected fresh uncertainty into global energy markets. Despite President Trump’s war goal ostensibly being regime change, he has succeeded in nothing but unnecessarily raising inflation and key global prices. Middle Eastern tensions have historically had outsized economic consequences, and the latest confrontation has again drawn attention to the vulnerability of global oil supply chains.
At the centre of those concerns lies the Strait of Hormuz, one of the most strategically important waterways in the world. A substantial share of global oil exports passes through the narrow strait each day, making it a critical artery for energy markets. Any disruption to shipping through the strait has the potential to trigger immediate volatility in oil prices and broader financial markets. This disruption has been described by some as the biggest to the energy supply since the 1970s, with Brent crude oil peaking at $126 per barrel on March 8.
THE BROADER STRATEGIC QUESTION BECOMES UNAVOIDABLE: HOW ARE OTHER MAJOR POWERS RESPONDING?
The conflict has already pushed energy prices higher and raised fears of a wider supply shock. Oil markets are notoriously sensitive to geopolitical instability, particularly in regions that play such a central role in global production and transport. Perception alone can drive prices upward if the safety of shipping routes is called into question. Higher energy costs, in turn, feed directly into inflation across the global economy, affecting everything from transport to food production.
Markets appear remarkably confident in predicting the conflict’s outcome. Yet after Iranian oil production shut down following the outbreak of the conflict, market predictions that production would return to pre-war levels and prices would rise only marginally appeared fanciful at best.
The new Iranian Supreme Leader, Mojtaba Khamenei, is purported to have said he will continue the blockade of the Strait of Hormuz for the foreseeable future. It seems unlikely for the blockade to be lifted any time soon.
These developments come at a delicate moment for the global financial system. After several years of inflationary pressure and rising interest rates, many economies remain vulnerable to renewed energy shocks. Sustained increases in oil and gas prices could slow economic growth and complicate efforts by central banks to stabilise inflation.
Geopolitical instability can also have subtler financial consequences. Investor confidence often depends as much on perceptions of stability and predictability as on underlying economic fundamentals. When international crises escalate, markets tend to reassess risk across entire regions and political systems. Even if the immediate economic damage is limited, the perception of growing geopolitical disorder can still shape investment decisions and global capital flows.
In that context, the broader strategic question becomes unavoidable: how are other major powers responding? For decades, the global economic system has been structured around American financial leadership. Yet rivals such as China have long sought to expand the international role of their own currencies and financial institutions. While the yuan still accounts for only a small share of global reserves, Beijing has steadily promoted its use in trade and cross-border payments. Initiatives such as currency swap agreements, alternative payment networks, and energy contracts denominated in non-dollar currencies all form part of a gradual effort to diversify the global financial system.
FOR NOW, THE AGE OF THE DOLLAR CONTINUES, BUT ARE THE FOUNDATIONS ON WHICH THAT ERA IS BUILT STARTING TO SHOW EROSION?
None of these developments yet constitutes a serious challenge to the dollar’s supremacy. The US still benefits from unmatched financial markets, strong legal institutions, and deep global trust in its economic system. But the direction of travel is nonetheless notable. Rather than a sudden collapse of dollar dominance, the world may be witnessing a slow diffusion of monetary power.
If so, the implications could be significant. American global leadership has long rested not only on military and diplomatic strength but also on the central role of the US economy within the international system. The dollar’s dominance has made Washington an unavoidable participant in global finance. A more multipolar monetary world, even if the dollar remains the leading currency, would inevitably dilute some of that influence.
Whether current geopolitical tensions accelerate that shift remains uncertain. Much will depend on how conflicts such as the confrontation with Iran unfold, how energy markets stabilise, and how global investors interpret the political direction of major powers. Financial dominance, like geopolitical power, ultimately rests on confidence. Once that confidence begins to erode, even gradually, the balance of the international system can begin to change.
For now, the age of the dollar continues. But are the foundations on which that era is built starting to show erosion?
Jamie Carey
Featured image courtesy of www.kaboompics.com via Pexels. Image license found here. No changes were made to this image.
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