Would De-Dollarization Hurt the U.S. Economy?

The U.S. dollar (USD) is the world’s reserve currency, providing continuous stability as a benchmark for all corners of the globe to look to, even in times of instability. But, whenever there is economic turmoil, especially in the states, economists and investors still must ask “what if?”. What if the system as we know it changed? What would it look like? Is it even possible? 

Not everyone wants the USD to hold a global currency monopoly. Emerging market economies might benefit from their native currency carrying weight on the international playing field. Adversarial nations like China and Russia would certainly prefer to be envy of the world with foreign investors clamoring for their Rubles and Yuans. Proponents of cryptocurrency, something universal and agnostic, either argue against having one dominant currency or are betting against its sustainability. Then there are the opponents of fiat currency who prefer clinging to gold and silver. De-dollarization can be both a goal and a result, depending on one’s stance.

Before exploring if the U.S. dollar is at risk of losing its status as the global reserve currency, let’s look at how it got there in the first place. Before World War I, most countries pegged their currencies to gold. During the war, participating countries suspended the gold standard to print more money to cover their military expenses. Britain, at the time the financial capital of the world, did not. They held to the gold standard and were forced to borrow money. In 1931, they finally abandoned the gold standard, immediately crushing the British pound, along with any countries trading in the pound. The U.S. dollar informally became the preferred currency.

Before entering World War II, the U.S. supplied the Allies’ weapons in exchange for gold, quickly making the U.S. the gold hub of the world. After the war, a return to a gold standard was all but impossible, the U.S. owned almost all of it (70% according to the IMF). In 1944, 44 Allied countries met at the Bretton Woods Conference and agreed to peg currencies to the USD, which would be pegged to gold. Over time, as U.S. Treasuries flooded global markets to finance the Vietnam War and domestic social programs, President Nixon ended the gold standard in 1971, allowing currency exchange rates to float.

Coincidentally, or intentionally, one natural resource replaced another. Following the 1973 oil crisis, the U.S. and Saudi Arabia built a closer relationship in which the U.S. increased oil imports from Saudi Arabia. Saudia Arabia reinvested much of their billions of U.S. dollars in U.S. Treasuries, creating what’s known as a recycling of petrodollars. There was not a formal pegging of oil prices to USD like there once was for gold, but a similar byproduct occurred. This same concept exists among other natural resources around the world paid for in U.S. dollars.

Question #1- Could the USD lose its global currency reserve status? 

Absolutely not. At least not anytime soon. There is the formal label since Bretton Woods, but then also the practical label. The USD is the reserve currency more than in name only because of its reliability, grounded in economic strength. The U.S. is still the largest economy in the world at $30.34 trillion GDP, over 50% larger than China or the E.U. The USD is very strong right now and according to SWIFT (Society for Worldwide Interbank Financial Telecommunications), the U.S. dollar’s share of global payments reached 49.1% in 2024 – a 12-year high. Conversely, the Chinese yuan reached their all-time high in 2024 representing 5% of global payments, still far from USD’s dominance. For crypto fans, it’s still not a major player as all cryptocurrencies combined account for roughly 0.5% of the world’s money supply.

While tariffs and potential trade wars are largely what prompted the popular debate over de-dollarization today, the immediate result is often a devaluing of the currency of the country facing tariffs, and a relative strengthening of the U.S. dollar.

Question #2- What would the fallout be if USD lost its reserve status? 

This would obviously be a huge hit to the U.S. There are emotional and financial events and reactions that are always intertwined. Markets would be affected by a weakened dollar, but also its reputation as the never defaulting “backed by the full faith and credit of the U.S. government” currency would be tarnished.

Diversifying away from the dollar, which has happened very slightly over the past few decades since the intro of the Euro, is not necessarily a bad thing for global growth or the U.S. But if total de-dollarization ever did occur, the fallout would be tremendous to all investors without another very strong, liquid currency taking the reins. The question then would be if the dollar’s demotion from reserve status were to happen gradually over a planned period of time, allowing retail and institutional investors to pursue replacements, or if it were to happen as result of a traumatic event. Gradual dollar diversification could favor emerging market investors, or a pivot to a new reserve, a new USD backed by some other superpower. Sudden de-dollarization might suggest gold, natural resources, and other non-fiat stores of value, granted these measures would be grasping at straws amid a likely global meltdown.

Written by Bryan M. Kuderna.
Have you read?
Countries in the world with the most female billionaires.
Countries ranked by the percentage of the workforce that is made up of women.
Countries with the most (and least) personal space.
World’s Most (And Least) Religious Countries.
Best Countries to Invest In Travel, Tourism, and Hospitality