Dollar Dominance Unravels Amid US Policy Missteps
The US dollar's role as the world's reserve currency has been eroding gradually for decades. However, various US policies have accelerated de-dollarisation at times.
After World War II, the US economy accounted for a quarter of world output and industry was strengthened rather than destroyed. This led to the US dollar becoming the world's reserve currency, with other currencies pegged to it at fixed exchange rates through an indirect gold standard.
The size, liquidity, and depth of US capital markets have reinforced the dollar's role, enabling the US government and companies to borrow at lower interest rates than others. However, the US economy has become more financialised and de-industrialised since then, accounting for less than a tenth of world goods exports.
Despite warnings about its problems, the dollar system has continued to dominate, with 90% of foreign exchange market transactions involving the dollar. Most central bank reserves are still denominated in dollars, and the US dollar is used to invoice around two-fifths of international trade.