The Dollar’s Dominance
Although it is summer, my Texas Lutheran University students still meet to discuss financial markets and portfolios. They recognize money never sleeps, and free pizza is a powerful motivator.
In preparation for class, each student had to research “the decline of the U.S. Dollar, and the impact upon world markets.”
To start the conversation, Valarie said, “For decades, the collapse of the United States dollar as the world’s primary reserve currency has been predicted, but hasn’t happened.”
She said “de-dollarization” has gained traction recently with large deficits and political tensions.
Mateo said, the primary reason the U.S. dollar is the top global currency is unparalleled liquidity.
He said in finance, liquidity brings more liquidity. Because everyone accepts the dollar, everyone wants the dollar. It is the universal economic language.
Mateo then said, “Based on data from the Bank for International Settlements, the dollar is involved in nearly 90% of all foreign exchange transactions.”
The U.S. Treasury market offers global investors, central banks, and corporations unmatched opportunities to park trillions of dollars safely while earning a reliable return. No other nation offers a comparable combination of market size, legal protections, and asset availability.
This dominance is reinforced by the global pricing of vital commodities.
Mateo offered research showing that oil, gold, copper, and agricultural products are priced internationally in U.S. dollars. He then said, “If a Brazilian company wants to buy electronics from South Korea, it rarely exchanges Brazilian reals directly for Korean won.”
Both currencies are converted into dollars to facilitate the transaction. Replacing this infrastructure would require a global overhaul of accounting systems, banking networks, and legal frameworks.
Pablo, a Canadian citizen, who was raised in Mexico and the U.S., offered a multi-cultural perspective.
Pablo agreed with Mateo regarding the dollar’s liquidity. He added that despite the political news cycle, the dollar offers institutional trust and the sheer scale of American capital markets.
Pablo said there has been a decline in global foreign exchange reserves held in dollars, but this is not due to economic decline. He added, “Over the past twenty years, the dollar’s share of global reserves has drifted from about 70% to 60%. But this shift has not benefited a single rival like the Chinese yuan. Instead, it diverted into currencies of U.S. allies, such as the Canadian dollar, the Australian dollar, and the Euro.
Pablo added that this offers diversification, not displacement. It reflects a growing global economy where more nations are capable of issuing stable debt, which creates a healthier global financial ecosystem without undermining the bedrock role of the U.S. dollar.
Jaiden questioned how much of the “de-dollarization” was simply political noise saying the transactional friction and cost of moving away from the dollar is far greater than any political motivations.
Jaiden said the United States operates under a strong framework of property rights, independent courts, and predictable rule of law.
Foreign investors know dollar-denominated assets cannot be arbitrarily seized or devalued by a sudden decree from a centralized political authority. This institutional trust forms the psychological foundation of the global financial system. Central banks hold reserves not out of love for American foreign policy, but because they require a stable valued asset that is highly tradable during an economic crisis. When panic strikes global markets, investors run toward the dollar in a flight to safety.
With the pizza boxes nearly empty, Oscar said, “For a currency to challenge the dollar, it would need an open, transparent economy willing to run large trade deficits to supply the world with its currency. I can’t find any rivals that meet these criteria.”
The Chinese Yuan is frequently cited as the biggest threat to the dollar, but accounts for less than 3% of global foreign exchange reserves. China’s government strictly controls the flow of money through the country.
The Euro, while stable and backed by a large economy, is structurally fragmented. It is a currency without a unified fiscal state.
Lastly, Adam opined that the dollar’s dominance is anchored by the unique role of the American consumer.
The U.S. runs trade deficits importing more goods than exports. While often criticized domestically, this deficit mechanism supplies the rest of the world with dollars for global trade.
Nations relying on exporting goods to the U.S. accept dollars in return. They reinvest dollars back into U.S. Treasuries, creating a self-reinforcing loop that funds American capital markets, keeping borrowing costs low.
My TLU students concluded that until another major economy is willing to deliver these benefits, the U.S. Dollar remains the world’s reserve currency.
Dave Sather is a Certified Financial Planner and the CEO of the Sather Financial Group, a fee-only and fiduciary strategic planning and investment management firm.
