Isaac Holt, Staff Writer

Every year, trillions of dollars worth of goods and services are traded between foreign entities on the global market. In 2023 the IMF estimated that global external trade amounted to roughly $30.7 trillion (USD), a nearly five trillion dollar increase since 2018. This figure represents a diverse spectrum of national, corporate, and individual economic factors that are unique not only geographically, but socially, culturally, and politically. The United States is nominally the largest economy in the world and plays a major role in influencing economic affairs on the world stage, things like exchange rates, market access, and liquidity of foreign exchange reserves have played to the advantage of the USD for much of modern history. Recent trends indicate that this is still the case to this day, however, there have been growing movements against the dominance of the USD in the global economy.

A foreign exchange reserve (Forex reserve) is a large reserve of currencies, bonds, or other securities held by a central bank. Forex reserves are used to maintain a positive balance of payments (trade) with other countries, control exchange rates, and maintain confidence in their domestic markets. Foreign exchange reserves are a vital part of the modern economic order, they allow countries to use a diverse range of foreign currencies to interface better with international markets and keep their economy safe from economic threats that could arise from global actors.

At the end of 2022, the IMF reported that 58.36% of official foreign exchange reserves were comprised of US Dollars. Since the early 90s, this percentage has steadily decreased each year from about 75%. This number only represents official reserves, it does not account for unreported reserves and certain other securities that may be kept by countries or central banks. Despite this, the fact that more than half of all Forex reserves are kept in USD means that there is an immense demand for Dollars in the global economy. By keeping exchange reserves in USD, countries can influence the nominal exchange rate between their currency and the USD. Countries that keep USD reserves are also able to utilize the strength of the USD in their economy to stimulate demand as the USD is historically one of the most stable and inflation-resistant currencies in the world.

Regional economic stability, while a big motivator of international economic policy, is not the only one. Starting in the 1970s, the price of crude oil imports to the US began to increase as a result of numerous global trends. OPEC countries comprise more than a third of the world’s oil production, and Saudi Arabia, one of the founding members, is second to only the US in total oil production worldwide. OPEC, a political organization of oil-producing countries, started to finance more of their oil deals in USD with the rise in prices in the 70s. This trend is very important to understanding the USD’s dominance of the global energy market, specifically the petroleum industry. By the 1980s a very large percentage of all OPEC oil deals, specifically with the country of Saudi Arabia, were financed solely in US Dollars, even if the buying country did not use USD as its primary domestic currency. Recently, some countries such as China have begun to sign agreements with OPEC countries like Saudi Arabia to finance oil deals in their own currency, a trend that could undermine the ‘petrodollar’ system.

Politics also have played an important role in the USD’s international role, the ability to control access to market and currency exchange has played a significant role in shaping U.S. foreign policy. In recent times, the term sanctions has been used by many U.S. administrations to describe economic limitations placed on countries or individuals that limit their ability to interact with the global USD market in some way. In response to the Russian invasion of Ukraine, the U.S. government announced major sanctions against Russian businesses and the Russian financial and banking sectors, preventing most Western corporations and businesses from trading or operating inside Russian territory. These sanctions were sweeping and have had massive effects on Russia’s economy, since the invasion Russia has lost an estimated (in USD) $450 billion in foreign exchange reserves and more than $1 trillion in foreign assets. These actions are predicated upon the U.S.’s ability to control Russia’s access to international markets as well as its ability to sell foreign reserves held in USD.

The history of the USD in the global economy coupled with the fact that U.S. Treasury bonds are backed by the full faith and credit of the U.S. government means that these bonds have been one of the safest investments for a foreign investor, often countries, to make. In its history as a country, the United States has never defaulted on treasury bond payments or securities that were backed by its full faith and credit. By purchasing a U.S. Treasury bond, a country is both investing in the strength of the U.S. economy and betting on its future success. 

In 1944, during the ending stages of WW2, the major allied powers realized the need to establish not only a new political world order but a new economic one alongside it. The system that came from this realization was called Bretton Woods, a complex international monetary management system that is still mostly in use today, albeit with some major changes and adaptations. 

Some of the major tenets of the Bretton Woods system were establishing the USD as the foremost international reserve currency, enabling all member countries to exchange their currency for USD at a set rate, and pegging the foreign USD-gold exchange rate to a set amount. Additionally, institutions like the World Bank and IMF were created to establish international monetary authorities that could foster better economic relations and trade between the traditional Western order and any non-aligned countries, specifically low-income, underdeveloped ones. 

BRICS, a multinational economic alliance between the countries of Brazil, Russia, India, China, and South Africa, is one of the most prominent alliances that seeks to usurp the traditional Bretton Woods system and the USD’s dominance of the global economy. Major institutions like the World Bank and IMF have come under attack from alliances like BRICS due to what they perceive as politicization of their economic policies and inequality in their outcomes, usually on the basis of ideological or political affiliations. 

Over the past few years, BRICS and its allies have created numerous projects like the New Development Bank and the BRICS payment system that are alternatives to major Bretton Woods institutions. The New Development Bank is BRICS’ ongoing initiative to create a counterpart to the World Bank. The World Bank has existed since WW2 and its primary goal has been to give loans and grants to middle/low-income countries to pursue national development projects. BRICS has stated that the goal of the New Development Bank is not to destroy the World Bank but to create a cooperating partner that involves more countries from the BRICS alliance and its affiliate nations.

Alliances like BRICS will likely continue to attract many states as time goes on. Since WW2, the U.S. has had many foreign policy successes and failures, the results of which have immeasurable effects on domestic and international markets. By dominating the currency exchange and foreign reserve aspects of the global economy, the U.S. has been able to leverage economic power to affect geopolitical change. This is a dynamic that BRICS has seen over time and wishes to respond to in their future policy decisions.

While there are always at least two sides to a conflict, it is important to underscore that the two sides are not necessarily enemies in this specific instance. Going forward, the USD will have a complex role in the global economy, and its position as the dominant foreign reserve currency might change. As the demand for USD and other currencies shifts over time, the ability of the USD to take center stage in economic affairs will fluctuate. The question of which currency or which economy will be number one is not as important as which policies will dictate a more cohesive and efficient economic system for the world. As a matter of policy, countries like ours must always stay at the forefront of responding to and acting on economic trends both in domestic and foreign markets.