US dollar dominance of world economy

Overvalued dollar
Weakness of dollar

Nature

US dollar dominance of the world economy refers to the widespread use of the US dollar as the primary global reserve currency and medium for international trade. This dominance is considered problematic because it grants the United States disproportionate economic influence, exposes other countries to exchange rate and policy risks, and can destabilize global markets during US financial crises. Additionally, reliance on the dollar limits monetary policy autonomy for other nations and can exacerbate global economic imbalances, prompting calls for diversification and reform of the international monetary system.

Background

The dominance of the US dollar in the world economy emerged as a global concern after the Bretton Woods Agreement (1944) established it as the primary reserve currency. Its centrality became increasingly apparent during postwar reconstruction, oil crises, and financial shocks, notably the 1971 collapse of the gold standard. Over subsequent decades, economists and policymakers have scrutinized the systemic risks and dependencies created by dollar hegemony, especially during periods of global financial instability.

Incidence

The rise in the cost of the dollar with respect to other currencies - about 70% since 1980 - resulted in American farmers and businessmen being unable to compete in overseas markets; domestic American industries being wiped out because foreign good cost much less than domestic products; developing countries' debts rising every time the dollar goes up; and the USA trade deficit reaching $150 billion in 1985, thus making the USA a debtor nation for the first time since World War I.

Claim

The world economy is dominated by the USA, whose dollar has superseded the established gold standard for world economy. The danger in allowing one nation's economy to support the equilibrium of the global economy is twofold: fluctuating trust in the USA' economy leads to world-wide monetary instability; and national pride in the dollar has become unduly inflated. The risk of renewed weakness of the dollar in the 1990s with rapid depreciation could push up inflation in the USA, raise domestic interest rates, and -if international investors become reluctant to hold dollar assets at prevailing yields - cause instability in financial markets.

Counter-claim

Concerns about US dollar dominance are vastly overblown. The dollar’s central role in global trade and finance provides stability, efficiency, and trust that no other currency currently matches. Fears of “dollar hegemony” distract from real economic challenges. Rather than being a problem, dollar dominance underpins global prosperity and reduces transaction costs. Calls to dethrone the dollar are misguided and ignore the practical benefits it brings to the world economy.