Opinion The world is moving on and the US dollar is failing to keep up

In the first half of this year, the US dollar registered its steepest decline since 1973, dropping more than 10 per cent against a basket of major currencies. This reflects broader vulnerabilities, both short-term pressures and long-range structural patterns. In the near term, President Trump’s renewed tariff push has rattled global trade flows. The uncertainty triggered by tariffs on allies and rivals alike has disrupted supply chains and raised fears of imported inflation. Crucially, global demand for the dollar is tied to international trade — most cross-border transactions are invoiced and settled in dollars. Tariffs disrupt that foundation.

Trump’s volatile policy

Less trade and more unpredictable policy mean fewer global transactions and reduced dollar demand. On the fiscal front, the “One Big Beautiful Bill Act” — promising tax cuts and infrastructure spending — will balloon the federal debt, which has already surpassed $36 trillion. Moody’s downgrade of US sovereign credit to Aa1 highlights global unease about America’s fiscal direction, especially as projections suggest debt could climb to 156 per cent of GDP within a decade. Compounding these pressures, the Organisation for Economic Co-operation and Development recently trimmed its 2025 US growth forecast from 2.2 per cent to just 1.6 per cent. Trump’s push for aggressive monetary policy easing further dampens the appeal of dollar-denominated assets.

Meanwhile, the dollar’s traditional role as a haven asset has weakened. Typically, in periods of global uncertainty, the dollar gains strength. But not this time. As investors brace for rate cuts and fiscal slippage, the greenback is no longer behaving like the safety net it once was. The psychological shift here is crucial: Confidence, once the dollar’s most valuable asset, is now eroding.

Yet, zooming out reveals a larger story. We may be witnessing the beginnings of a structural shift in the global monetary order, echoing the end of the Bretton Woods system in the early 1970s. That episode ended the dollar’s link to gold and initiated the era of fiat currency regimes. Today, the catalyst is not gold but geopolitics, sanctions, and shifting economic weight.

The weaponisation of the dollar — especially through sanctions — has spurred nations to explore alternatives. Historically, dollar-denominated sovereign debt has also been seen as a subtle but persistent mechanism by which wealth has flowed from poorer nations to the United States. Many Sub-Saharan and low-income South Asian countries are locked into cycles of dollar repayments, vulnerable to US monetary policy. This financial dependency is being seen as deepening structural inequalities in the Global South. Russia’s experience during the annexation of Crimea and later the Ukraine war, where over $300 billion of its reserves were frozen, proved pivotal. For China, this was a wake-up call. The fear that it too could be locked out of the global dollar system — especially amid tensions over Taiwan — has prompted an accelerated push for de-dollarisation.

China, with the world’s largest foreign currency reserves, has ramped up gold purchases — over 700 tonnes in 2024 alone. Gold, unlike dollar reserves, is sanction-proof and can be stored domestically. Other central banks followed suit, with global gold purchases hitting record highs in early 2025. This silent shift suggests growing mistrust in the dollar’s future.

Meanwhile, China and Russia are expanding alternative payment systems like CIPS and settling trade in non-dollar currencies. Over 90 per cent of trade between the two now occurs in yuan or rubles. BRICS nations, newly expanded to include Iran, Indonesia, and the UAE, are exploring a gold-backed currency for intra-bloc trade. While this won’t dethrone the dollar overnight, it chips away at its monopoly.

Still, it is vital to note that de-dollarisation remains aspirational, not imminent. The dollar’s incumbency advantages are enormous. Roughly 88 per cent of all foreign exchange transactions involve the dollar. Over 60 per cent of global reserves are held in dollars. The euro and the yuan lag far behind, constrained by fragmentation and capital controls. No real rival matches the dollar’s liquidity and legal safety. Yet the trend lines are clear. The more the US politicises its monetary tools, the more the world builds alternatives. And this is where India must tread carefully.

What about India?

A weakening dollar may benefit India’s exports briefly, but volatility in global capital flows could pose risks. The rupee must not remain passive. India should push for expanding rupee trade, building diversified reserves, and preparing its financial systems for a multipolar world. This is not India’s challenge alone. Across the Global South, countries are calling for monetary alternatives — be it for trade, debt, or payments. The BRICS initiative for a gold-backed currency reflects this shift. Though its execution remains uncertain, the desire to reclaim autonomy is real.

For India, this is both a hedge and an opportunity. As a systemically important economy in BRICS+, India can help shape a more balanced, inclusive monetary order. Rather than simply reacting to a changing order, India must position itself as a co-architect of what comes next. The future of the dollar may not be one of collapse, but of dilution. A world where the dollar shares space with regional anchors is no longer far-fetched.

The writer is a research scholar in the field of Economics at the Department of Humanities, Social Sciences and Management, National Institute of Technology-Srinagar and former Chief Dealer, Foreign Exchange, The Jammu & Kashmir Bank