A Deep Dive into the US Dollar: Analysis of Its Status, Influence and Related Key Points

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The U.S. dollar is the cornerstone currency of the global economic system. Data shows that in 2024, the dollar still accounted for 58% of global official foreign exchange reserves, its dominant position seemingly unshakable.

However, an interesting phenomenon is that since 2020, voices questioning its long-term status have grown increasingly loud in the international community.

This contradictory situation raises a core question. It compels us to deeply analyze the U.S. dollar, systematically exploring the true foundations of its status and the challenges it will face in the future.

Key Takeaways

• The dollar’s strong position stems from the U.S. economy, military, and financial markets.
• Federal Reserve policies impact the global economy and other countries’ currencies.
• Dollar fluctuations affect commodity prices and personal wealth.
• “De-dollarization” is a slow process; the dollar remains a key currency.
• Understanding the dollar index, petrodollars, and U.S. Treasury bonds aids in analyzing the dollar.

Foundations and Pillars of Dollar Hegemony

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The global hegemony of the U.S. dollar is not innate but built upon a series of carefully crafted historical events and several enduring pillars. Understanding these foundations is the first step in unveiling the mystery of the dollar.

From Gold to Oil: The Power Transition

Throughout history, the transition of global dominant currencies has followed a cyclical pattern. A currency’s rise is always tied to the peak of its issuing nation’s comprehensive strength.

Historically, the Dutch guilder and British pound both served as world currencies. The guilder’s decline began in the late 17th century due to waning national competitiveness and war expenditures. Subsequently, the pound rose with the British Empire but was ultimately replaced by the dollar after two world wars due to Britain’s declining strength and massive debt. This historical process reveals the inseparable link between a currency’s status and a nation’s power.

The dollar’s hegemonic status was formally established in the aftermath of World War II. In 1944, the Bretton Woods Conference established a new global monetary system centered on the dollar. The core design of this system was as follows:

• Dollar Pegged to Gold: The U.S. promised to exchange dollars for gold at a fixed price of $35 per ounce.
• Other Currencies Pegged to the Dollar: Other nations’ currencies maintained a fixed exchange rate with the dollar.

This arrangement effectively made the dollar equivalent to gold, becoming the cornerstone of global trade and reserves.

However, this system contained a fatal flaw known as the “Triffin Dilemma.” As the global economy grew, the world needed more dollars for circulation and reserves. But for the U.S. to supply more dollars, it had to maintain a trade deficit, which undermined confidence in the dollar’s ability to be converted into gold. From 1965, due to the Vietnam War and domestic social program expenditures, U.S. inflation surged, and dollar over-issuance intensified. Ultimately, in 1971, President Nixon announced the suspension of dollar-to-gold convertibility, marking the collapse of the Bretton Woods system.

As the world questioned the dollar’s future, the U.S. swiftly found a new “anchor” for the dollar—oil. In the 1970s, the U.S. reached a pivotal agreement with Saudi Arabia. Under this deal, Saudi Arabia agreed to price and settle all its oil exports in dollars. In exchange, the U.S. provided military protection and support. Subsequently, other major OPEC member states followed suit.

This agreement created the Petrodollar System. It mandated significant global demand for the dollar. Any country wanting to buy oil had to acquire dollars first, making the dollar indispensable for global commodity transactions even after decoupling from gold.

Economic, Military, and Financial Pillars

The petrodollar system is just one mechanism sustaining the dollar’s status. Its true foundation lies in the U.S.’s unmatched trio of pillars: a robust economy, overwhelming military power, and unparalleled financial markets.

1. Economic Pillar: The U.S. has the world’s largest economy. According to the International Monetary Fund (IMF), the U.S. nominal GDP reached $26.85 trillion in 2023, far surpassing other major economies. This massive economic scale translates to vast production, consumption, and innovation capabilities, providing the fundamental real-economy support for the dollar’s value.
2. Military Pillar: Robust military power is key to safeguarding the dollar’s global interests and trade routes. The U.S. consistently ranks first in military spending. According to the Stockholm International Peace Research Institute (SIPRI), its military expenditure exceeds the combined spending of the next several countries. This overwhelming military advantage ensures the U.S. can protect its global allies and economic partners (e.g., oil-producing countries in the petrodollar system) while deterring nations challenging its dominance.
3. Financial Pillar: The U.S. boasts the world’s deepest, most open, and most liquid financial markets. Whether in stocks, bonds, or derivatives, their scale and complexity are unmatched. Global capital, whether seeking safety or high returns, views U.S. financial markets as the top destination. This strong capital “gravitational pull” ensures sustained and stable demand for dollar-based assets (especially U.S. Treasury bonds), further solidifying the dollar’s position as the world’s primary reserve currency.

These three pillars reinforce each other, forming a powerful positive feedback loop that underpins the dollar’s unshakable global hegemony.

In-Depth Analysis of the U.S. Dollar: The Pulse of the Global Economy

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The dollar’s hegemonic status is not just a macro concept; it acts as the pulse of the global economy, with each beat profoundly impacting national economic policies, corporate operations, and personal wealth through complex transmission mechanisms. To truly understand the dollar, we must deeply analyze how the U.S. dollar shapes the world we live in.

Global Ripples of Federal Reserve Policies

The Federal Reserve (Fed) is nominally the U.S. central bank, but its monetary policies have far-reaching impacts beyond U.S. borders. Every decision it makes creates significant economic ripples globally.

The Fed primarily influences global liquidity through two tools: quantitative easing (QE) and interest rate adjustments.

• Quantitative Easing (QE): When the economy faces recession risks, the Fed injects massive amounts of dollars into the market by purchasing assets like U.S. Treasury bonds. For instance, after the 2008 financial crisis, the Fed’s QE program expanded its balance sheet from about $500 billion to $4.25 trillion. During the COVID-19 pandemic, the Fed relaunched QE, announcing a $700 billion asset purchase plan in March 2020 alone, ultimately increasing its assets by trillions of dollars. These newly created dollars flowed globally, inflating asset prices.
• Interest Rate Adjustments: When the U.S. faces inflationary pressures, the Fed raises rates to tighten dollar liquidity. This attracts global capital back to the U.S. for higher risk-free returns. Historical evidence shows that when rate hikes are driven by U.S. economic slowdowns and deteriorating investor confidence, the impact on emerging markets is particularly negative.

Shockwaves of Fed Rate Hikes The rate hike cycle starting in 2022 is a prime example. Due to dollar strengthening and capital outflows, many emerging economies’ currencies were severely hit.

• Turkish Lira
• Argentine Peso
• Colombian Peso
• Egyptian Pound

These currencies depreciated by over 15% against the dollar in that year. Additionally, data from the past decade shows a significant statistical correlation between dollar strength and capital outflows from emerging markets, further exacerbating financial turmoil in these countries. An in-depth analysis of the U.S. dollar’s global impact begins with understanding the Fed’s baton.

The “Dollar Shackle” for Other Central Banks

For many developing countries, the dollar is both a tool for development and a heavy “shackle.” This is primarily evident in dollar-denominated debt.

Due to underdeveloped domestic financial markets, many emerging economies must issue bonds denominated in foreign currencies (mainly dollars) to raise development funds. According to the European Centre for Development Policy Management (ECDPM), over 50% of low- and middle-income countries’ sovereign debt is denominated in dollars or other foreign currencies.

This creates a significant risk exposure. When Fed rate hikes strengthen the dollar, these countries need more of their local currency to repay the same amount of dollar debt. The sharp increase in debt burdens leads to serious consequences:

This mechanism acts like an automatically tightening shackle, trapping many countries during dollar-strong cycles. Thus, an in-depth analysis of the U.S. dollar reveals how it can become a potential constraint on development for Global South nations.

A Barometer for Personal Wealth

Dollar fluctuations not only affect national macroeconomics but are also closely tied to personal wealth, serving as a “barometer” for wealth changes.

First, the dollar is the pricing currency for global commodities. Prices for gold, oil, and other commodities typically move inversely to the dollar’s value.

When the dollar strengthens, fewer dollars are needed to buy the same amount of gold or oil, causing their prices to tend to fall. Conversely, when the dollar weakens, commodity prices tend to rise. This relationship means the dollar’s strength directly impacts returns for gold investors and global energy costs.

Second, dollar exchange rates affect consumer purchasing power. For U.S. consumers, a strong dollar makes imported goods (e.g., electronics, cars) cheaper, helping curb inflation. For consumers in other countries, a strong dollar makes dollar-priced imports more expensive.

Finally, for global investors, dollar fluctuations are a key variable affecting portfolio returns. Take a U.S. investor holding international stocks as an example:

• When the Dollar Weakens: Their foreign assets (e.g., Japanese or European stocks) appreciate when converted back to dollars, yielding additional exchange gains. For instance, during periods of dollar weakness, foreign stocks may outperform U.S. stocks.
• When the Dollar Strengthens: The opposite occurs. Historical data shows that in some years, strong gains in Japan’s stock market yielded U.S. investors returns less than half of what Japanese investors earned due to yen depreciation against the dollar.

Thus, whether trading commodities or allocating global assets, an in-depth analysis of the U.S. dollar’s fluctuation patterns is essential for making informed decisions.

Key Points for Understanding the Dollar

To fully grasp the dollar’s mechanisms, we must master several core concepts. These are critical tools for analyzing dollar trends and understanding its global influence. An in-depth analysis of the U.S. dollar hinges on interpreting these points.

Dollar Index (DXY)

The Dollar Index (DXY) is the most important indicator for measuring the dollar’s relative value in global markets. It is calculated by tracking the dollar’s exchange rate changes against a basket of six major currencies.

The six currencies and their weights clearly highlight the euro’s dominant role in the index.

For traders and analysts, the DXY is a valuable tool. It not only helps them monitor the dollar’s relative strength but also provides a key benchmark for formulating forex trading strategies. When anticipating dollar strength, investors may buy DXY; conversely, they may short it.

Petrodollar

The petrodollar system is a cornerstone of global dollar demand. This system mandates that global oil transactions are primarily priced and settled in dollars. Thus, any country needing to import oil must hold dollars, creating sustained and massive demand for the dollar.

However, this system is facing challenges. In recent years, several countries have begun experimenting with bypassing the dollar in oil trade.

Data shows that in 2023, about one-fifth of global oil trade was settled in non-dollar currencies, a trend worth noting.

U.S. Treasury Bonds

U.S. Treasury bonds are debt issued by the U.S. government to raise funds. Widely regarded as the world’s safest financial asset, they are a core component of central banks’ foreign exchange reserves. Global demand for U.S. Treasuries significantly bolsters the dollar’s status.

However, risks are evident: the ballooning debt scale. According to U.S. Treasury data, the total U.S. national debt has surpassed $38 trillion. This massive debt raises market concerns about its long-term sustainability, posing a potential challenge to dollar confidence.

The dollar’s status is rooted in its economic, military, and financial pillars, profoundly impacting the global economy and personal wealth. However, the “de-dollarization” trend is emerging, with over 90% of Russia-China bilateral trade now settled in local currencies. Nonetheless, alternative currencies face significant hurdles. The depth of U.S. financial markets is unmatched, and China’s capital controls limit the yuan’s global appeal. History suggests that dominant currency transitions are gradual. The world may be moving toward a multipolar currency landscape, rather than a sudden dollar collapse. The dollar’s future remains one of the most critical economic questions of our time.

FAQ

Will “De-Dollarization” Happen Quickly?

It’s unlikely in the short term. The dollar’s status is supported by a strong economy, military, and financial markets. While some countries are exploring alternatives, no global substitute matches the depth, liquidity, and safety of U.S. financial markets. This process will be gradual.

How Do Dollar Appreciation or Depreciation Affect Individuals?

Dollar fluctuations directly impact personal wealth.

When the Dollar Appreciates:

• Dollar-priced imports become cheaper.
• U.S. investors’ overseas assets lose value when converted back to dollars.

When the Dollar Depreciates: The opposite occurs.

What Is the Future of the Dollar?

The world may be moving toward a multipolar currency landscape. This means the dollar will remain a major currency, but its absolute dominance may wane. Currencies like the yuan and euro may play larger roles in global trade and reserves, creating a system of multiple coexisting currencies.