The end of dollar dominance?

This article is authored by Prabhu Dayal, former ambassador, New Delhi.

The idea that the US dollar's dominance will eventually end is a common theme in global economics, often referred to as de-dollarisation. Historically, reserve currencies like the British pound or Spanish dollar have reigned for about 80 to 100 years before being replaced. The US dollar has held this position since roughly 1944. While the dollar currently remains the world's primary reserve currency, its long-term status is facing structural shifts. Many analysts and financial reports indicate that Donald Trump's policies, particularly his trade wars, tariffs, and heavy use of financial sanctions, are accelerating global efforts toward de-dollarisation. His approach has driven countries to seek alternatives to reduce reliance on the US dollar, which has been used as a geopolitical tool, prompting a search for safe-haven assets like gold.

Dollar (Pixabay)

Most analysts do not expect the dollar to lose its status abruptly. Instead, they foresee a gradual shift toward a multipolar world where several currencies share the spotlight. While the dollar is losing its "heft," it still remains the primary global reserve currency, and many analysts see this transition as a slow evolution toward a multi-currency system rather than an imminent collapse.

The US dollar is supported by the petroleum market through the "petrodollar system," where global oil sales are primarily settled in dollars, forcing countries to hold dollar reserves. After the US's 1971 departure from the gold standard, it negotiated with OPEC countries (notably Saudi Arabia) in 1974 to stabilise the dollar by tying it to oil. This established the dollar as the dominant global reserve currency, fuelling immense demand for it and enhancing US financial, economic, and geopolitical power. Oil exporters receive US dollars (petrodollars) and reinvest these large surpluses back into the US treasury bonds, securities, and financial assets. Since oil is a vital commodity, nations must maintain large reserves of US dollars, ensuring consistent global demand. The petrodollar system allows the US to easily finance its trade deficits and maintain high foreign demand for its debt.

The petrodollar system is experiencing a gradual, long-term weakening due to accelerating de-dollarisation trends, rising geopolitical multipolarity, and the global energy transition. While the US dollar remains dominant, increased usage is being witnessed of non-dollar currencies like the Chinese yuan or bilateral deals for oil trade, often as a result of US sanctions. This development, alongside reduced reinvestment of oil revenues into US assets by Gulf States, is shifting the petrodollar landscape. For example, Saudi Arabia is increasingly using oil revenues for domestic diversification rather than purchasing US treasuries.

Thus, the US dollar is experiencing a gradual decline in its global dominance. This shift is characterised by a reduced share of the dollar in global central bank reserves, increased use of alternative currencies for trade, and diminishing confidence due to geopolitical and domestic policy factors.

Here is how the dollar is losing its 'heft', based on 2025–2026 data:

• Decreased share in central bank reserves: Data from the International Monetary Fund (IMF) and other financial analyses confirm that the share of US dollar-denominated assets in global foreign exchange reserves has declined to roughly 56–57% as of late 2025, down from over 66% a decade earlier. For example, the Reserve Bank of India (RBI) has reportedly been decreasing its holdings of US government debt to a five-year low of around $174 billion as of early 2026, mitigating risks from a volatile US dollar and potential sanctions. According to RBI, treasuries now make up roughly one-third of the country’s forex reserves, down from around 40% a year ago. With gold and other assets accounting for a growing share of reserves, India’s strategy echoes steps taken by bigger holders such as China, according to a Bloomberg report.
• Rising use of local currencies in trade: Countries are increasingly bypassing the dollar in bilateral trade. Examples include China using the yuan to buy Russian oil, India and the UAE using local currencies for oil, and Bangladesh paying for projects in yuan. Countries fear the US using the dollar as a geopolitical tool, prompting a search for alternative, secure payment methods. Emerging economies aim for a multipolar global financial structure, reducing vulnerability to American economic policy. India is increasingly trading in the Indian Rupee (INR) as part of a strategic push to "internationalise" the currency, reduce dependence on the US dollar, and mitigate external shocks. As of mid-2025, banks from over 30 countries, including Russia, the UAE, Malaysia, and several in Africa and Asia, are authorised to operate Special Rupee Vostro Accounts (SRVA) for trade settlement.
• Growing demand for gold: Central banks, particularly in emerging markets like China, Russia, India and Turkey, are aggressively purchasing gold to diversify away from US dollar reserves, driving prices to record highs. Motivated by fears of geopolitical sanctions and inflation, this trend has seen gold holdings reach their highest level in nearly 30 years. The RBI is actively purchasing gold to diversify its foreign exchange reserves, reducing its heavy reliance on US dollar-denominated assets and increasing security against geopolitical, economic uncertainties, and currency volatility. As of early 2026, RBI has notably reduced US treasury holdings and significantly increased gold holdings, aligning with global trends among central banks. Gold's share in India’s total reserves grew from 5.87% in March 2021 to over 14.7% in October 2025. The RBI has also moved significant amounts of gold from overseas vaults (notably London) to domestic vaults in India, marking a shift towards safeguarding assets on home soil.
• Policy uncertainty and trade actions: Unpredictable trade policies, including Trump's 2025 Liberation Day tariff, have caused significant volatility and reduced the perceived safety of US assets. This has prompted a "flight from safety," resulting in a decline in investor confidence, major selloffs in the S&P 500, and the US dollar falling to four-year lows in January 2026. In February 2026, the US Supreme Court ruled that the administration's use of emergency powers under the International Emergency Economic Powers Act (IEEPA) to impose these broad tariffs was illegal. Despite the court ruling, the administration has signalled it will pursue new global tariffs of 10% to 15%, maintaining a high level of trade policy uncertainty.
• Mounting national debt: The US national debt has surpassed $39 trillion as of 18th March 2026, driven by sustained borrowing for economic, defence, and social programmes, leading to over $1 trillion in annual interest payments. The debt is growing at a rate of $1 trillion every 100 days. The rising debt burden creates risks of market volatility, inflation, and reduced trust in the dollar as the primary global reserve currency. This surge is intensifying global concerns regarding fiscal sustainability, increasing the risk of higher global interest rates and currency market volatility. Global confidence in the sustainability of the dollar has eroded.
• Declining foreign demand for US treasuries: Foreign ownership of US treasury securities has experienced a structural decline from over 50% during the 2008 financial crisis to approximately 31% by early 2025.This shift indicates a significant reduction in the reliance on foreign, particularly official, holders to finance US government debt, with foreign residents holding roughly a third of outstanding Treasuries in 2025 compared to nearly 60% in 2008.

In conclusion, Trump’s policies are accelerating global de-dollarisation by creating incentives for other nations to seek alternative currencies, despite his vocal support for the dollar's supremacy. Frequent use of economic sanctions and tariffs against both adversaries like BRICS nations and allies like the EU has spurred countries to reduce reliance on the US dollar to bypass American influence. This policy uncertainty has driven an increased demand for gold as a hedge. While Trump has threatened to impose 100% tariffs on countries that move away from the dollar, experts argue that these same threats ironically accelerate the search for non-dollar alternatives. Policy instability and sabre-rattling have undermined trust in the dollar as a stable, neutral, and safe-haven asset. While the dollar is not facing an imminent collapse of its reserve status, it is experiencing a wounded hegemon scenario, with its dominance under threat from a long-term, structural diversification toward gold and other currencies.

This article is authored by Prabhu Dayal, former ambassador, New Delhi.