On February 24, 2022, Russia’s invasion of Ukraine shocked the world, sparking one of the biggest conflicts in Europe since World War II. At the same time, not only a geopolitical realignment of power is taking place, but also a reversal of the post-war Western-imposed monetary peace with the dollar becoming a contested currency and its dominance of the global financial system being challenged.
The swift response by the United States and its allies, including freezing Russian assets, highlighted the enormous power the US wields through the dollar’s position as the world’s reserve currency.
For nearly eight decades, this global reserve currency status provided the US with significant economic advantages and underpinned its hegemony in the liberal order, including lower borrowing costs and significant influence over global trade.
However, the conflict in Ukraine has led many countries, allies and rivals, to reconsider their reliance on the dollar. Countries like China and Russia among other BRICS+ countries are now more determined to challenge the dominance of the dollar and reduce their exposure to American economic influence.
The ability of the US to use the dollar as a tool of economic warfare, combined with its domestic fiscal challenges, poses significant risks to the future of the dollar as a global reserve currency. More specifically:
1. The US Budget Deficit: A Growing Concern for Economic Stability
The US has run significant budget deficits for years, with no clear plan to reverse this trend. In fiscal year 2023 alone, the federal budget deficit increased by nearly $1.7 trillion due to rising debt interest costs and increased government spending on health, social security, and defense.
With public debt now over $35 trillion, the interest payments alone could erode global confidence in the dollar. Despite this worrying trend, there is no plan to roll back the fiscal data, making it unlikely that the situation will improve soon.
2. The US trade deficit: Eroding confidence in the currency
In addition to its budget deficit, the US runs a significant trade deficit, consistently importing more than it exports – a trend that has persisted for nearly five decades.
In 2022, the trade deficit reached a record $948 billion and in 2023 it was $773 billion, underscoring the country’s dependence on foreign goods and services. This persistent imbalance forces the US to borrow from foreign creditors, further increasing the national debt – and all the central bank monetization can do.
While this trade deficit was sustainable because of global confidence in the dollar, a sustained deficit could gradually erode that confidence.
3. Geopolitical changes: The challenge from BRICS+
The US response to the Russian invasion of Ukraine, particularly the freezing of Russian assets, has heightened global concerns about the dangers of over-reliance on the dollar. For many states, this action underscored the enormous power the US wields in the international financial system.
In response, the BRICS+ grouping—made up of Brazil, Russia, India, China, South Africa, Iran and others—has become the most important power after the dollar in the global economy, rapidly accelerating efforts to reduce their dependence on the dollar.
Together, the BRICS+ represent a combined population of 3.64 billion and approximately $30 trillion, or 30% of global GDP, making it a major influential coalition in the global economy. China, as a key player in BRICS+, is leading the charge by promoting the use of its currency, the yuan, in international trade and actively forging currency swap agreements with other nations.
In addition, Russia, China and many other BRICS+ members have rapidly increased their central bank gold holdings, a clear signal of their growing discomfort with keeping a significant portion of their reserves in US dollars.
Over the past two years, foreign central banks have significantly increased their purchases of gold, with more than 1,136 metric tons in 2022 alone—the highest level since 1967.
At the same time, the US dollar’s share of global foreign exchange reserves has declined from around 71% in the early 2000s to around 58.4% by the end of 2022, reflecting a decisive trend towards reserve diversification driven by growing influence of the BRICS+ bloc.
