Understanding the Decline of the US Dollar: Key Factors and Implications

Abstract

This paper mainly focuses on the declining dominance of US dollar especially in the recent century and the role of different factors in this phenomenon. Recently decline is seen in the power of US dollar. The global dollar reserves faced so much pressure in recent times. Within two decades a sharp decline is seen in US dollar share of global currency reserves. This paper starts with the review on the factors that are causing the decline of US dollar. Many internal and external factors are causing this decline in dollar’s hegemony. These factors include external factors like de-dollarization, rise of other currencies like renminbi, euro, rise of China as a global power, rise of digital currencies, geopolitical risks, US sanctions on the Russia etc. and many internal factors like monetary policy given by US central bank, rising prices or inflation, demand for currency, economic growth, export prices, increasing federal debt etc. Countries mainly BRICS countries are moving towards de dollarization by proceeding their trade in their local currencies or currencies other than dollar, similarly rise of China as a big economic power also fastening this process as China increasing the scope of its renminbi, digital currencies also replacing paper currency effecting dollar’s hegemony, US sanctions on countries like Russia, Iran etc. also forcing states to move towards other banking systems. Likewise, US internal factors like inflation is on 40 years peak and federal debt rise up to 110% of GDP, economic growth is declining. These internal and external factors speeding up this process. As major world trade is still happening in dollar so decline in its dominance has a major impact on the global financial system. So, to study about its declining phenomenon is very important and this research mainly analyze on this declining trend of US dollar. The paper also looked at the short history of dollar that how it became the paper currency and how it emerged as main currency of the world. At the last of paper, I also talked about whether the decline of dollar is imminent? which is an important question asked by different economists and political analysts. These observations hint how the dollar’s hegemony is under threat.