The U.S. dollar is still the world’s dominant reserve currency. It remains unassailable, despite a counter-factual world where geopolitical turbulence and the resulting trade invoicing shifts advance a dollar alternative. As long as the dollar maintains its hegemony over around 94% of all global reserve holdings, its primacy is in little danger of being challenged. A 2022 paper from the Federal Reserve economist shows that the US dollar is still very strong. It makes the case that these geopolitical movements from the dollar don’t represent much real danger to its supremacy.
Observers have been calling for an end to the dollar’s dominance in trade invoicing since before the latest sanctions round began. This isn’t all bad — in fact it makes the dollar a better reserve currency. What gives the dollar its strength is all of this economic and political capital. This is particularly the case with those countries that maintain military alliances with Washington.
The Resilience of the US Dollar
The US dollar’s status as the world’s predominant reserve currency is similarly longstanding, cemented over decades. Although global trade patterns have changed inherently and through changes in trade invoicing behavior, it still holds on to its top trade invoicing currency. The dollar dominates the composition of total reserve holdings—almost 94%. This reality points to its robust and entrenched position within the existing structures of the global financial system.
Geopolitical tensions are fueling speculation about the dollar’s long-term place in trade invoicing. Its place as a reserve currency is more solid than ever. Analysts suggest that attempts to move away from using the dollar for trade invoicing do not equate to a diminishment of its reserve status.
Insights from the Federal Reserve Economist’s Paper
The 2022 paper by a Federal Reserve economist provides valuable insights into the current status and future prospects of the US dollar. According to the paper, "that roughly three-quarters of foreign official holdings of U.S. assets are with countries that have military ties to Washington."
It’s this militaristic connection to military alliances that deepens the dollar’s security. Those connections further reinforce its status as a dominant reserve currency. The paper concludes that shifts in trade invoicing are already possible. It stresses that these changes are not going to bend the dollar’s fundamental position as a key global reserve.
The Global Context and Economic Implications
Discussion of the US dollar’s status in global reserves is only one piece of the puzzle. It deeply knits with a number of shifting geopolitical threads and economic-oriented movements. A number of countries have been experimenting with alternatives to trade invoicing. The dollar’s well worn infrastructure and default setting of history give stability and complacency.
Economic experts claim that the reason for the dollar’s supremacy goes far beyond the use of currency preferences in trade policy. Economic policies and international relations further bolster its authority. This is especially true with countries that have large dollar reserves due to military partnerships.