USD: The Inertia of Incumbency

Perhaps the most significant event in modern monetary history is President Nixon’s 1971 suspension of gold convertibility^qr, signifying a pivotal shift to fiat currency, with the dollar’s value now ultimately resting on three pillars:

1. The Federal Reserve’s monetary credibility
2. Strategic agreements with oil-producing nations
3. Continued use as the primary invoicing currency in global trade^ks

This decision responded to the depletion of US gold reserves from 20,000 tons in 1950 to 8,333 tons by 1971, as foreign nations like France increasingly redeemed dollars for gold^ql. The move severed the dollar’s formal link to gold but inadvertently strengthened its global role through subsequent petrodollar agreements^k.

The 1974 US-Saudi pact required oil sales in USD, creating self-reinforcing demand cycles^ks:

• Oil importers needed dollars for energy purchases
• Exporters reinvested surplus dollars in US Treasuries
• This "recycling" mechanism deepened dollar liquidity pools

By 1980, 85% of global oil trades used USD, making it indispensable for energy markets^s. This system transformed the dollar into a quasi-commodity currency, with its value indirectly backed by the world’s most traded physical commodity. As fossil fuel is the foundation of modern society^t, the US Dollar continues to be the foundation of global financial system.

The USD benefits from unmatched market depth:

• $7.5 trillion daily turnover in forex markets, with the USD involved in 88% of all trades (2022 data)^u
• 60% of global debt securities denominated in dollars^v
• 50-70% of international trade invoices use USD^w

This liquidity creates powerful network effects – businesses and nations use dollars because others do, minimizing conversion costs, further reinforcing dollar dominance.

The US provides critical infrastructure for global finance:

• Rule of law for contract enforcement
• Deep capital markets with $53 trillion in financial assets^x
• Central bank swap lines to ensure global dollar liquidity eg. During the 2020 COVID crisis, Federal Reserve swap lines provided $450 billion in liquidity to 14 central banks in effort to stabilize financial markets by providing foreign central banks with access to US dollars, demonstrating the dollar’s role as the global lender of last resort^yz

As of 2024, the US federal debt stands at approximately 121% of GDP^α, marking the highest level of public debt ever recorded in peacetime^β, underscoring ongoing concerns about fiscal sustainability^γ. According to the 2024 Financial Report of the United States Government, under existing assumptions, the debt-to-GDP ratio is projected to exceed 200% by 2049 and reach over 500% by the end of the century, driven by persistent primary deficits and rising interest costs^δ. This trajectory implies that without policy changes, debt would grow faster than the economy indefinitely, imposing increasing burdens on future generations.

The ability to meet one's debt obligations is crucial not only for individuals but also for governments. Therefore, the U.S. debt crisis is closely linked to the status of the US dollar as the world's reserve currency. Historically, the dollar has been considered a "safe haven" asset, meaning global investors rely on U.S. Treasury bonds for stability. However, as US debt levels rise, concerns about fiscal sustainability are growing, leading to increased borrowing costs and potential economic instability. This could trigger a corrosion trust in the dollar-based financial system.

At what debt-to-GDP level does the first domino fall, potentially triggering a cascade that topples the unipolar, dollar-based global order? That question, debated by researchers worldwide, warrants a book-length exploration and is far beyond the scope of this article. However, in short, political and economic factors greatly complicate the path forward. While precise thresholds are elusive, the U.S. faces immediate fiscal challenges. In 2025, the US must navigate the debt limit, appropriations deadlines and expiring tax cuts, all within a context of substantial deficits and a narrowly divided Congress, making timely and sustainable fiscal adjustments extremely uncertain^ε. This political gridlock, coupled with rising debt, could create the conditions for a future fiscal crisis. As the Hoover Institution notes, America's debt is approaching levels that may trigger market panic, financial crises, and deep recession^ζ. As Moody's downgrade of the US's credit rating signals, this is more than just a technical market event; it represents an emerging consensus that the United States' mounting debt burden has shifted from an abstract risk to a strategic constraint on U.S. power and leadership^η.

Despite these high debt levels, several factors help mitigate risks to the dollar’s long-term stability:

• Approximately 65% of US dollars in circulation are held overseas, which externalizes inflation risks beyond the domestic economy^θ.
• The US Treasury market remains the global safe asset benchmark, supported by unmatched liquidity and depth^ι. As of May 2025, no other bond market approaches the $28.6 trillion size of the US Treasury market, reinforcing its central role in global finance^κ.

Foreign confidence in the dollar remains relatively strong, as evidenced by foreign holdings of US Treasuries increasing to about $8.5 trillion in December 2024^λ, reflecting sustained demand for dollar-denominated assets despite debt concerns.

President Donald Trump’s confrontational economic policies arguably undermined global trust in the US institutions; and by extension US assets including the dollar. His aggressive tariff impositions and political pressure on the Federal Reserve challenged the Fed’s independence, creating uncertainty and volatility across financial markets^μ. This turmoil led to a rare "sell America" trade, with simultaneous sell-offs in US stocks, bonds, and the dollar itself, which fell to a three-year low, reflecting a crisis of trust^μν.

The BRICS bloc - comprising Brazil, Russia, India, China, and South Africa - has made limited but strategic progress in challenging the dominance of the US dollar in global finance. Despite ambitious rhetoric, structural and political constraints have limited the effectiveness of these efforts.

While de-dollarization makes compelling headlines, JP Morgan suggests that transactional costs of transitioning to a multi-currency system (estimated at 1.5% of global GDP annually)^τ would ensure continued dollar primacy.

The euro accounts for approximately 19.83% of allocated global foreign exchange reserves as of Q4 2024, making it the second-largest reserve currency after the US dollar^υ. However, several structural challenges limit its potential to fully rival the dollar:

• Fragmented sovereign debt markets across the Euro Area create risks of financial instability and contagion^φ.
• The absence of a unified fiscal authority hinders coordinated economic policy and the issuance of common Eurobonds^χ.
• The daily forex turnover for the euro is significantly lower than the US dollar, which impacts its liquidity and global usability^ψ.

While the Euro Area's foreign exchange reserves totaled approximately $101.33 billion USD in April 2025^ω, these structural factors continue to prevent the euro from functioning as a true alternative reserve currency.

Despite being the world's largest trading nation, China's yuan (renminbi) constitutes only 2.18% of allocated global foreign exchange reserves as of Q4 2024, according to the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) data^υ. Several factors constrain its internationalization:

• Capital account restrictions and limited currency convertibility constrain yuan internationalization^a1.
• The People’s Bank of China lacks full independence, raising concerns about monetary policy credibility^a1.
• Geopolitical distrust of the Chinese Communist Party’s governance and transparency further limit global acceptance^b1c1.
• Only about 3% of global trade invoices are denominated in yuan^a1.
• Offshore yuan bond issuances surged in 2024, reflecting progress but still limited global penetration^d1.

Precious metals, particularly gold, with its role as a safe-haven asset and a hedge against currency devaluation, inflation, and geopolitical instability, remain a store of value but lack the liquidity and scalability to serve as a global reserve currency alternative. With that said, it is important to point out central banks worldwide have been significantly increasing their gold purchases in recent years, continuing this trend strongly into 2025. They have accumulated over 1,000 metric tons of gold annually for each of the past three years, more than doubling the average of 400–500 tons per year seen in the previous decade^e1f1. BRICS nations collectively hold significant gold reserves (about 5,700 tonnes), representing 16% of global gold reserves, but this has yet to translate into a coordinated gold-backed currency^g1h1i1.

Cryptocurrencies such as Bitcoin reached a market capitalization of approximately $1.2 trillion in 2024 and have been gaining momentum on institutional adoption ^j1. Though that is quite an impressive milestone, the relatively small scope recognition of institutional backing and regulatory uncertainties limit their utility as reserve assets. Bitcoin’s volatility remains extremely elevated in comparison to the US dollar.

Latest 90-day annualized volatility for Bitcoin: 42.53%
Latest 90-day annualized volatility for US Dollar Index: 9.29%

Central Bank Digital Currencies (CBDCs) show promise for enhancing payment efficiency and financial inclusion, but none have yet achieved the scale or trust necessary to challenge the dollar’s dominance^k1l1.