Special Feature

Prepared by: Dr. Mohammad Diab
Lebanese Researcher in Economics and Geopolitics

Source: Arab Thought Center

BETH publishes this study as part of its commitment to making high-value research accessible while preserving the author's original text. The publication is accompanied by an editorial overview and a brief commentary to place the study within its broader context.

BETH Overview

Lebanese researcher Dr. Mohammad Diab examines the future of the U.S. dollar amid accelerating geopolitical and economic transformations, the rise of the BRICS bloc, and the expanding use of national currencies and digital currencies.

He argues that the dollar is likely to remain the world's dominant currency for the foreseeable future despite mounting pressures resulting from global shifts, the growing influence of emerging economies, and ongoing efforts to build a more multipolar international financial system.

The article explores the four fundamental functions of money in the global economy, the factors underpinning the dollar's strength, the limitations facing BRICS in establishing a common currency, and the impact of financial technology on reshaping the international monetary order. It concludes that the world is moving toward a new monetary equilibrium rather than the end of the dollar's dominance in the near term.

Full Text

The world is undergoing profound transformations that may bring to a close an era that has endured since the end of the Second World War—an era defined by the dominance of a single imperial power, the United States, whose economic and financial supremacy extended across the globe even at the height of the Cold War. The immense military and political power possessed by the opposing Soviet bloc proved incapable of containing that dominance, ultimately collapsing under the weight of its own economic weaknesses and structural deficiencies.

Following the war, the United States successfully built an international financial and banking system with the U.S. dollar at its center, enabling it to establish economic dominance over the global economy. The dollar became both the foundation and the principal symbol of that supremacy.

Today, as the world gradually enters an era of multipolarity, the key question arises:

Is it finally time for the dollar to relinquish its throne?

This article seeks to answer that question.

It is unlikely that the U.S. dollar will lose its position as the world's dominant reserve and trading currency in the foreseeable future. However, geopolitical developments, together with advances in financial technology, could accelerate the transition toward a new monetary balance in which influential regional currencies play a larger role.

Since 2009, this prospect has driven BRICS countries to explore alternatives to the existing international financial architecture, including expanding the use of national currencies in trade and financial settlements among member states. These efforts represent a deliberate strategy aimed at gradually reducing the dollar's dominant position within the global economy.

The motivations behind this strategy are both economic and geopolitical. The leading BRICS members—particularly China and Russia—seek to reduce their dependence on the dollar-centered financial system, which leaves them vulnerable to sanctions and financial pressure whenever geopolitical competition intensifies.

They are also leveraging modern financial technologies—including the rapid development and wider adoption of digital currencies—to expand the use of national currencies in international payments. These innovations provide opportunities to bypass U.S.-dominated correspondent banking networks while lowering transaction costs.

Nevertheless, establishing a single BRICS currency remains unrealistic at present due to the significant structural differences among member economies.

According to the Optimum Currency Area (OCA) theory, several essential conditions must be met before a successful common currency can emerge. These include:

• High labor mobility across member states.
• Strong trade integration.
• Similar business cycles and economic shocks.
• A functioning fiscal transfer mechanism.

At present, BRICS countries remain far from meeting these requirements.

A far more practical and achievable objective is the continued development of payment settlement mechanisms based on national currencies, alongside the creation of reserve instruments and local-currency bond markets.

The Four Functions of Currency

The role of the U.S. dollar in the global economy is often analyzed from macroeconomic or geopolitical perspectives. While these approaches are broadly valid, it is equally important to recognize that the international financial system is fundamentally driven by microeconomic decisions made by businesses, financial institutions, and households.

A currency performs four essential functions in international economic relations:

1. Invoice Currency
2. Vehicle (Settlement) Currency
3. Reserve Currency
4. Financial Asset Currency

Each of these functions is supported by different economic incentives.

Invoice Currency

An invoice currency is the currency in which the prices of goods and services are denominated and contractually agreed upon for settling payments, fees, and financial obligations. In this role, the currency serves as the unit of account.

Vehicle (Settlement) Currency

A vehicle currency is the monetary unit used to settle financial obligations, repay debts, or complete payments for goods and services under commercial contracts. It plays a critical role in international trade by reducing exchange-rate risks.

The settlement currency may differ from the invoice currency.

Reserve Currency

A reserve currency is used by central banks and other monetary authorities to accumulate foreign exchange reserves. It also serves as a safe-haven asset and as the benchmark currency for pricing globally traded commodities such as oil.

In this capacity, it performs the function of a store of value.

Currency as a Financial Asset

A currency also serves as the denomination for financial assets, including:

• Foreign direct investment (FDI)
• Portfolio investment
• International borrowing
• Development assistance and financing

Growing Pressure on the Dollar as a Settlement Currency

When conducting international transactions, economic agents may choose either the producer's currency or the buyer's currency as the settlement currency. Although this may appear straightforward, the reality of international payments is considerably more complex.

Numerous studies have examined the impact of exchange-rate fluctuations on prices. When goods are priced in the producer's currency, exchange-rate changes are fully transmitted to the importing market. Conversely, when prices are denominated in the buyer's currency, exchange-rate movements have little or no direct impact on product prices.

International transaction data indicate that companies generally prefer to use one of the world's major currencies—most notably the U.S. dollar—as their settlement currency.

As a result, movements in a country's exchange rate against the dollar significantly influence domestic price levels. The greater a country's reliance on the dollar for international payments, the stronger this effect becomes.

At the microeconomic level, producers also consider currency risk when selecting a settlement currency. They assess how exchange-rate fluctuations may affect their revenues. To minimize such risks, firms often choose the currency that matches their production costs—that is, the currency of the producing company.

Market structure also influences this decision. When consumer demand is highly sensitive to price changes, producers are more likely to adopt the same settlement currency used by their competitors, whether that is the domestic currency or the U.S. dollar.

Transaction costs are another decisive factor.

For both settlement and payment purposes, companies seek to minimize the costs associated with international transactions. This significantly reinforces the dollar's role as the world's principal settlement currency.

The effect is self-reinforcing:

the more companies use the dollar, the deeper and more liquid dollar markets become, reducing transaction costs even further.

Recent geopolitical developments have had only a limited impact on the dollar's share of international payments.

Despite increasing competition, the dollar continues to dominate global payment settlements, accounting for approximately 40% of international transactions, even though U.S. exports represent only about 10% of global trade.

The euro remains primarily a regional currency, used mainly within the European Union.

However, over the past decade, a clear regional trend has emerged toward reducing dependence on the U.S. dollar.

Russia, China, Thailand, Indonesia, Malaysia, and several other countries have introduced measures to expand the use of their national currencies.

In Russia, the share of international settlements conducted in the national currency rose from 10% in 2010 to 38% in 2023, before increasing further to 40% by the end of 2024 following successive rounds of Western sanctions.

During the same period, China's share increased from virtually zero to nearly 50%, while Thailand's rose from 8% to 16%.

The Chinese yuan has become the dominant settlement currency in trade between China and Russia, accounting for approximately 90% of bilateral transactions in 2024.

China is also making substantial efforts to internationalize the yuan through structural agreements promoting national-currency settlements and financial support mechanisms, including ASEAN currency-swap arrangements and numerous bilateral agreements with countries across Asia.

Looking ahead, advances in financial technology are expected to accelerate this trend.

Central Bank Digital Currencies (CBDCs) and new cross-border payment platforms are already under development.

Among the most notable initiatives are:

• Project Cedar, a joint initiative between Singapore and the New York Innovation Center.
• Project Mariana, led by the Bank for International Settlements in cooperation with the central banks of France, Singapore, and Switzerland.
• mBridge, involving China, Hong Kong, the United Arab Emirates, Saudi Arabia, and Thailand.
• BRICS Bridge, designed to facilitate cross-border payments among BRICS members.

At the same time, international payment systems based on national currencies can continue to operate effectively even without relying on central bank digital currencies.

The Dollar's Declining Role as a Global Reserve Currency

When a country determines the composition of its foreign exchange reserves, it places particular emphasis on the reliability and liquidity of the currencies it holds. To this day, the U.S. dollar remains the world's primary reserve currency, supported not only by its dominant role in international payments but also by its widespread use by central banks in building official reserve assets.

The selection of a reserve currency depends largely on the objectives assigned to international reserves by a country's central bank.

For example, if the primary objective is to stabilize the exchange rate, the chosen reserve currency should account for a significant share of the country's foreign reserves.

If reserves are primarily intended to finance external trade or service foreign debt, greater importance is attached to the currency composition of trading partners and the denomination of external liabilities.

Other economic considerations—including reliability, liquidity, financial market depth, and potential returns—also influence reserve allocation strategies.

Beyond economic factors, geopolitical considerations increasingly shape reserve currency decisions. Countries often favor the currencies of political and strategic allies as reserve assets. This trend has become more pronounced amid intensifying geopolitical rivalries, expanding trade disputes, and the growing influence of BRICS as an emerging force that could gradually reshape the post-Cold War international order.

The Dollar Remains Dominant—But Its Share Is Gradually Declining

Despite these shifts, the U.S. dollar remains the cornerstone of the international monetary system.

Most analysts expect it to retain its dominant position over the coming decade. Nevertheless, its share of global foreign exchange reserves has steadily declined in recent years.

This trend began with the introduction of the euro and accelerated with the gradual internationalization of the Chinese yuan alongside China's expanding role in the global economy.

According to the International Monetary Fund (IMF):

• The U.S. dollar accounted for 57.8% of global foreign exchange reserves in 2024, down from 65.4% in 2016.
• The euro represented 19.8%.
• The Japanese yen accounted for 5.8%.
• The British pound stood at 4.7%.
• Despite China's position as the world's second-largest economy, the yuan represented only about 2% of global reserve holdings.

By mid-2025, approximately 56% of global foreign exchange reserves and nearly half of all international payments continued to be denominated in U.S. dollars.

Heavy reliance on a single currency creates structural vulnerabilities, particularly for countries seeking to reduce their exposure to U.S. economic influence. It may also generate broader imbalances within the global macroeconomic system.

Diversification Is Increasing

Despite these emerging trends, the dollar continues to serve as the world's principal reserve currency thanks to its repeated selection by central banks and the unmatched depth and liquidity of U.S. financial markets.

At the same time, geopolitical developments are encouraging central banks to diversify their reserve portfolios by increasing holdings of other currencies and gold.

The composition of international reserves is gradually evolving.

Holdings of the Japanese yen, Canadian dollar, and Australian dollar have increased.

The Chinese yuan has also gained ground through Beijing's efforts to internationalize its currency, including:

• Currency swap agreements.
• Financing under the Belt and Road Initiative.
• Development of China's central bank digital currency.

Meanwhile, gold has become an increasingly important component of global reserves, driven both by central bank purchases and rising global gold prices amid heightened economic uncertainty.

Searching for Alternatives

The need for a reliable reserve asset beyond the U.S. dollar has encouraged the creation of institutional mechanisms capable of performing some reserve functions.

One notable example is the Contingent Reserve Arrangement (CRA) established by BRICS in 2014, providing emergency liquidity support for member states.

The Currency of Financial Assets

The currency used to denominate financial assets—including foreign direct investment, portfolio investment, international borrowing, and development finance—is influenced by many of the same economic factors discussed earlier:

• Financial market depth.
• Liquidity.
• Exchange-rate volatility.
• Transaction costs.

However, the relative importance of these factors varies according to the type of investment.

For investors purchasing sovereign debt issued by emerging economies, for instance, liquidity often matters more than absolute currency stability, particularly when investors are willing to assume exchange-rate risk.

The "Original Sin" Problem

A substantial body of economic literature has examined the inability of many developing countries to borrow internationally in their own currencies—a phenomenon known as "Original Sin."

The concept was first developed by economists Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza.

Their central argument is that underdeveloped domestic financial markets limit developing economies' ability to attract long-term international financing denominated in local currency.

In a 2022 study, Eichengreen and his colleagues reviewed the commonly cited causes of this problem—including high inflation, fiscal imbalances, and unstable monetary policy—but concluded that the single most statistically significant factor determining a country's ability to borrow in its own currency is the size of its economy.

Original Sin creates significant vulnerabilities for emerging markets through currency mismatch—a situation in which a country's assets are denominated in one currency while its liabilities are denominated in another.

Such mismatches have frequently contributed to major financial crises.

Following the 2008 global financial crisis, several emerging economies partially overcame this constraint by deepening their domestic financial markets and increasing borrowing in local currencies.

However, the long-term sustainability of this trend—and its effectiveness in reducing currency risk—remains uncertain.

Institutional Developments

The transition toward greater use of national currencies has also been supported by several institutional initiatives.

Among them:

• The Asian Development Bank issued its first Indian rupee-denominated bonds in 2014.
• The New Development Bank (BRICS Bank) has issued bonds denominated in Chinese yuan and the South African rand, creating credible local-currency financial instruments for member countries.
• Under the initiative of central bank governors from East Asia and the Pacific, the Asian Bond Fund 2 (ABF2) was established, contributing significantly to the development of local-currency bond markets across Asia.

Toward a New Monetary Balance

The four functions of a currency are closely interconnected—a conclusion supported by both modern economic theory and empirical evidence.

The advantages a currency gains through widespread use in one area—such as deeper financial markets, greater liquidity, and lower transaction costs—enhance its attractiveness and encourage its adoption in other areas through powerful network effects.

Economic theory also allows for the coexistence of multiple dominant currencies.

For example, the Chinese yuan could emerge as a third major unit of account alongside the U.S. dollar and the euro. Economic modeling suggests that such a scenario is feasible if a sufficient number of countries choose the yuan as a reference currency.

The euro, meanwhile, already occupies a dominant position—but largely within its own regional sphere. However, the supply and flexibility of euro-denominated financial assets remain insufficient to support a much broader global role.

Current geopolitical developments, shifting global power balances, and rapid advances in financial technology may collectively accelerate the transition toward a new international monetary equilibrium characterized by the emergence of stronger regional currencies and a gradual decline in the dollar's relative dominance.

Nevertheless, it is still premature to predict the end of the U.S. dollar's leading role in the foreseeable future.

Despite changes in the global balance of economic power, the United States remains the world's largest economy.

Combined with the financial and banking institutions established under U.S. leadership after the Second World War—which continue to retain remarkable strength, depth, and international influence—this provides the dollar with substantial resilience and enables it to preserve its dominant position for years to come, even if many believe that such dominance may not last indefinitely.

BETH Commentary

This study offers a rigorous academic perspective on one of today's most frequently debated economic questions:

Has the era of the U.S. dollar come to an end?

Its principal value lies in distinguishing between the political ambition to reduce American financial influence and the economic realities that continue to underpin the dollar's global position.

The study concludes—implicitly rather than explicitly—that the transition toward a multipolar monetary system has already begun. However, this transformation is expected to be gradual rather than abrupt.

The real challenge, therefore, is not replacing the U.S. dollar overnight, but building credible alternatives supported by sufficient financial depth, institutional strength, and international confidence.