The dominance of the US dollar as the world’s reserve currency has long been a cornerstone of global finance. Yet, this hegemony faces increasing scrutiny, as nations and blocs like BRICS challenge its supremacy. With Donald Trump’s re-election and aggressive rhetoric, the stakes have never been higher. As he warned, "You leave the dollar and you’re not doing business with the United States because we are going to put a 100 per cent tariff on your goods."
This threat is emblematic of the geopolitical friction underpinning the de-dollarization movement. Trump’s policies, aimed at reinforcing the dollar’s dominance, coincide with BRICS’ efforts to reduce dependence on it—a dynamic that could reshape global finance.
The historical context
The dollar’s ascent to global dominance began with the Bretton Woods Agreement in 1944, establishing it as the world’s primary reserve currency. However, this reign has not gone unchallenged. Nations like Russia, China, and Iran have long sought alternatives, citing the dollar’s weaponisation in geopolitics. For instance, the US froze $600 billion of Russia’s foreign reserves and removed it from the SWIFT payment system in response to the Ukraine war, highlighting vulnerabilities for nations reliant on the dollar.
BRICS summit: Signals of change
At the recent BRICS summit in Kazan, Russia, President Vladimir Putin described the dollar as a “weapon,” echoing sentiments of many nations that question the fairness of the current system. While discussions of a unified BRICS currency remain theoretical, tangible steps toward de-dollarization are evident. The bloc’s increased use of local currencies for trade settlements and the rise of central bank digital currencies (CBDCs) are examples of its evolving strategy.
China, in particular, is leading this charge, leveraging its digital yuan and pushing for alternatives to dollar-based trade. India, while aligning with BRICS, maintains strong ties with the West, creating a delicate balancing act. This geopolitical tension within BRICS—notably between India and China—poses challenges to its cohesion and broader ambitions.
Actions speak louder than words
The shift away from the dollar is not merely rhetoric. Data reveals a decline in the dollar’s share of global reserves, from 70 per cent in 2000 to approximately 58 per cent today. Meanwhile, BRICS nations have reduced their reliance on the dollar for banking and debt transactions. For instance, the share of BRICS’ international bank claims in local currencies has grown from 2.9 per cent in 2000 to 15.4 per cent in 2024.
However, the dollar remains dominant, accounting for over 46 per cent of global trade invoicing and debt issuance. Replacing such an entrenched system will take decades, not years.
The role of CBDCs and currency baskets
Technological advancements, particularly CBDCs, could accelerate de-dollarization. Projects like mBridge, a cross-border CBDC initiative, demonstrate how digital currencies can facilitate trade without relying on the dollar. Similarly, currency basket settlements—where multiple currencies share the burden of trade—are gaining traction.
While promising, these initiatives face hurdles, including regulatory alignment and interoperability. Furthermore, CBDCs could expose nations to cyber threats and economic instability if not carefully managed.
Challenges to de-dollarization
Despite the momentum, de-dollarization is fraught with challenges. The dollar’s dominance stems not just from US economic might but also from trust and stability—qualities difficult to replicate. Internal divisions within BRICS, coupled with economic disparities, undermine its collective strength. For instance, India’s border disputes with China and differing priorities within the bloc hinder unified action.
Additionally, the shift away from the dollar could destabilize global markets. A significant devaluation of the dollar might trigger capital flight, disrupt trade, and exacerbate inflation, impacting both emerging and developed economies.
Trump’s tariff threats: A double-edged sword
Trump’s renewed focus on "America First" policies includes punitive tariffs against nations abandoning the dollar. While this may deter some, it risks alienating allies and accelerating de-dollarization efforts among adversaries. For instance, BRICS’ push for financial sovereignty has gained traction precisely because of perceived US overreach.
The road ahead
The battle for global currency dominance is intensifying. While BRICS nations are making strides toward reducing dollar reliance, internal challenges and the entrenched nature of the dollar-based system limit their progress. Trump’s hardline approach may temporarily bolster the dollar’s position but could also accelerate the search for alternatives.
Ultimately, the question is not whether de-dollarization will happen but how and when. As nations navigate this complex landscape, the future of global finance hangs in the balance. The dollar’s reign may continue for now, but the cracks in its foundation are impossible to ignore.
Abhinav Kad is a student of the PGDM Class of 2025, Great Lakes Institute of Management, Gurgaon.
The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.
