Why the world still uses US dollars

By the OFX team | 12 March 2025 | 6 minute read

The United States dollar has become the closest thing the world has to a global currency.

First printed in the form the world knows it in 1914, a year after the establishment of the Federal Reserve, the dollar played second fiddle to the pound sterling until the Bretton Woods Conference in 1944, after which – in line with the relative statuses of the United States and United Kingdom, as the Second World War played out – the US currency officially became the world’s reserve currency.

The Bretton Woods Agreement drawn up at the eponymous conference set up the global post-war monetary system by establishing rules, institutions and procedures for conducting international trade, and accessing the global capital markets using the US dollar, which was fixed to gold. Effectively, the greenback became the world’s reserve currency, the term used for a foreign currency that central banks and other sovereign monetary authorities hold as part of their foreign exchange reserves, to store wealth and to be used in international transactions, international investments and all aspects of the global economy.
Under Bretton Woods, the US government promised to redeem its dollars for gold at US$35 an ounce. By 1961, however, the amount of dollar claims outstanding began to exceed the US government’s stock of gold; and by 1971, President Nixon closed the gold window, no longer allowing foreign central banks to exchange dollars for the US Treasury’s gold¹. The Smithsonian Agreement of that year abolished the gold standard and the fixed exchange rate regime, instituting floating exchange rates. But given that the United States has remained the world’s largest economy and, most international transactions continue to be conducted with the dollar, and it remains the de facto world currency.

About 59% of nations’ global reserves is held in US dollars²; that is down from 72% in 1999, but that was the year when the euro was introduced as an accounting currency. Since the euro became an operating (actual) currency in 2002, its use as a reserve currency has peaked at 25% of global reserves, declining to 21% at present. But it is the only competitor of any note, although the Japanese yen, the British pound and others (including the Australian dollar) are used in smaller proportions.

In the US$7.5 trillion-a-day foreign exchange markets, the US dollar is the dominant currency, on one side of about 90 per cent of all transactions. The greenback is part of nine of the top ten most-traded currency pairs (the euro/sterling pair is the only non-dollar pair to make an impact, being the tenth most-traded pair, at 2% of the market).

The vast bulk of the world’s oil transactions occur in dollars. The US capital markets continue to be the largest in the world. US Treasury bonds are considered the globe’s risk-free asset, and a safe-haven asset into which investors flood in times of market corrections or geopolitical stress, to ride out the storm. And you need dollars to buy them.

The dollar is the logical currency of trade. The Federal Reserve estimates³ that between 1999 and 2019, the dollar accounted for 96% of international trade transactions in the Americas, 74% in Asia and 79% around the rest of the globe. Globally, banks used dollars for approximately 60% of their non-domestic deposits and loans.

Simply put, the Benjamins remain the world’s most important means of exchange.

The US dollar has not always been unthreatened in that status: in the 1980s, the Japanese yen had its champions, and in the 2000s, similar hopes were held for the euro. But those currencies could not maintain their economic clout.

More recently, as the Chinese economy has grown to legitimately threaten the USA’s reign as the world’s largest economy, speculation has grown that the Chinese yuan – or renminbi (the ‘people’s currency’) – could be the next challenger. Since the late 2000s, China has made a concerted effort to internationalise the RMB, which has become, paired with the US dollar, the fourth most traded currency pair in the forex market, at 6.6% of the market.

Further RMB internationalisation has started to come. In 2022, when Chinese President Xi Jinping visited Saudi Arabia, the Saudis agreed to accept the yuan for oil sales. In the same year, China and France completed the first liquefied natural gas (LNG) trade using yuan, and China and Brazil agreed to use the yuan in cross-border transactions.

While these trade flows can use RMB, there is still limited access to Chinese financial markets: China’s capital account is not fully open, which limits the RMB’s ability to become an international currency. Considerable restrictions on capital flows remain in place. Also, China itself has very large dollar-asset holdings and the Chinese financial system still relies heavily on dollars. While use of RMB in trade is expected to increase, much of that is government-driven, and struck on the back of bilateral deals such as the one with Saudi Arabia. It does not yet appear to be market-driven.

There is no question that, given the geo-political changes in the world, China (and the other nations in the BRICS bloc) would like to de-dollarise, and embrace non-dollar currencies – for example, the euro – while also promoting use of RMB. But as an October 2024 paper4 from the Carnegie Endowment for International Peace put it, “China’s significant inter-connectivity to the dollar financial system is, in the near term, likely to persist,” despite its desire to change that. There would be gnashing of teeth over this situation in the leafy leadership compound of Zhongnanhai in Beijing, but China got itself into a position where about half of its overall reserves are in dollars.

There is a reason other than trade why some countries would like to see the central role of the US dollar diminished – the perception that the US uses the dollar’s status as a geo-political weapon.

In February 2022, Russia’s invasion of Ukraine caused an estimated figure of up to $350 billion ($565 billion) of Russian central bank foreign exchange reserve assets – half the total amount – to be frozen, by sanctions imposed by Western governments. To put it mildly, Russia was and remains incensed.

Russia had already experienced similar sanctions in 2014, which prompted the Bank of Russia to implement its ‘Fortress Russia’ policy, switching part of its dollar reserves to euro, RMB and gold. Billed as a policy to help insulate Russia’s fiscal position from external shocks, Blind Freddie now sees it as a precursor to what the Kremlin eventually planned to do in Ukraine. But again, the dollar’s paramountcy limited how far the Bank of Russia could take this policy.

To the countries on the other side of sanctions, despite the legal and moral justifications that could be argued, the freezing – and possibly, confiscation – of reserve assets on the basis of “The West’s” (read, the US’) view of countries’ behaviour becomes a justification for non-Western countries to want to de-dollarise. As China watches the sanctions applied to Russia after it invaded Ukraine, it does not take much imagination to wonder what kind of action could cause China to fear similar sanctions – quite apart from any mounting desire in the non-western countries to trade directly with each other in their own currencies, and cut the US dollar out of the equation. Sanctions and the threat of confiscation change the rules of the game, for some players.

Against these considerations, there is the massive inertia of incumbency, and the sheer importance of the dollar on the global stage – and the convenience of the trade and market infrastructure that has been built around that primacy. That can be eroded, as the dollar’s reserve-currency market share shows – but replacing it is another story altogether.

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