In the global economic system, currency hegemony stands as a distinctive economic phenomenon whose emergence and development are not only the inevitable results of changes in the international monetary regime but also a significant reflection of shifts in the global political economy. From a historical standpoint, the transfer of currency hegemony often accompanies the relocation of the global economic center of gravity and the reconstruction of international economic order. This article aims to explore the formation mechanisms, evolutionary trajectory, and current multifaceted challenges of U.S. dollar hegemony through an analytical framework that integrates theory with real-world dynamics, revealing its internal logic and dilemmas, and offering theoretical reflections on the future trajectory of the international monetary system.
Differences and Essences of British and American Currency Hegemony
The precondition for currency hegemony lies in a currency being fully internationalized, fundamentally dependent on its ability to sustain a current account deficit in its international balance of payments. Throughout history, only Britain and the United States have successively held such monetary supremacy.
Britain’s attainment of monetary hegemony stemmed, on one hand, from the sterling’s unwavering creditworthiness, and on the other from its effective balance of payments management through its discount rate. This mechanism safeguarded Britain’s gold reserves and upheld convertibility, prompting central banks worldwide to follow the Bank of England’s interest rate policy. As the British economist Keynes once remarked, London’s credit flows “influence global credit conditions to such an extent that the Bank of England can almost claim the role of conductor of the international orchestra.”
However, British monetary hegemony was essentially a gold-based currency hegemony, making the term “sterling hegemony” somewhat misleading. In contrast, U.S. monetary hegemony is sovereign-currency-based, making “dollar hegemony” an accurate description. Although there is some historical linkage, the two forms of hegemony are qualitatively distinct and not directly successive.
Britain’s system relied on absolute gold-value standards, whereas the United States’ hegemony relies on the international demand for U.S. currency in settlement, marking a fundamental conceptual shift.
Historical Emergence of Dollar Hegemony
First phase: The dollar replaced the sterling as the international currency. During World War I, major nations suspended gold convertibility, while the U.S. stockpiled gold. By 1917, U.S. reserves accounted for 40% of global gold. Post-war, the U.S. held $22 billion in war loans, and New York eclipsed London as the global financial hub—ushering in the first wave of dollar internationalization.
During World War II, the U.S. extended $50.1 billion in aid under Lend-Lease (equivalent to approximately $800 billion today). Britain opened its markets and enabled sterling–dollar convertibility, and China pegged its currency to the dollar. These developments accelerated dollar globalization. After the war, the Marshall Plan further solidified the dollar’s global role.
Second phase: The U.S. pioneered de-monetization of gold domestically. In the wake of the Great Depression, FDR in 1933 nationalized gold, criminalized private hoarding, closed gold-convertibility, and separated domestic and foreign dollars—setting the stage for the Bretton Woods system’s eventual collapse.
Third phase: From a “privileged burden” to the petrodollar. By 1944, the U.S. held 74.5% of global gold reserves. Under Bretton Woods, the dollar became the world’s reserve currency, though it granted excess privilege—most notably the “exorbitant privilege” of running trade deficits, while other countries retained gold convertibility. This imbalance led to declining gold reserves and the system’s collapse in 1971 when Nixon closed the gold window.
In 1974, the U.S.–Saudi petrodollar agreement mandated oil be priced and sold in dollars, backed by U.S. security guarantees. OPEC followed suit in 1975. The petrodollar system replaced gold, expanding global dollar demand. The establishment of SWIFT in 1973 enabled global dollar payments, further cementing its settlement role. Thus, dollar hegemony rose atop Bretton Woods’ ashes, anchored by petrodollar demand and bolstered by SWIFT-led settlement technology.
Challenges and Competitions Facing Dollar Hegemony
Dollar hegemony implies that U.S. monetary policy is given precedence worldwide, strengthening the dollar’s status while simultaneously exposing its vulnerabilities.
External challenges include threats to the petrodollar, Eurozone and emerging-market currency competition, and the disruptive potential of central bank digital currencies (CBDCs). The petrodollar’s geopolitical entanglements opened the door for oil exporters to consider alternative currencies. The rise of the euro, RMB, and others has eroded the dollar’s share in global reserves (IMF data shows a decline from 58.24% in 2024 Q2 to 57.39% in 2024 Q3). Chinese and Russian oil-for-yuan deals highlight this shift.
Meanwhile, CBDCs (e.g., proposed U.S. bills to block Fed-issued digital currency) challenge the existing dollar-based banking settlement system—potentially bypassing SWIFT, and weakening dollar settlement dominance.
Structural Vulnerabilities Within Dollar Hegemony
There are two hierarchical dimensions: (1) the dollar’s supremacy among sovereign currencies in global settlement and reserves; (2) the dominance of onshore (U.S.-regulated) dollar assets over offshore dollar assets. Both are backed by policy safeguards, creating favorable dollar interest rate and exchange rate environments.
However, U.S. policy often disregards global implications. Fed interest rate decisions, treated as domestic policy, ripple globally—prompting nations to hoard dollars and adopt U.S. interest norms to manage external balances.
Further complicating matters, onshore-offshore dollar tensions—amplified by financial sanctions and long-arm jurisdiction—represent a form of dollar weaponization that erodes the relationship between onshore and offshore dollars, driving “de-dollarization.”
Dollar hegemony also hinges on global liquidity provision via U.S. current account deficits—exporting goods and dollars. But U.S. protectionist tariffs under Trump weaponize dollar returns, undermining this mechanism.
Domestically, excessive financialization, persistent QE, and mounting federal debt hollow out the real economy. This weakens the incentives for offshore dollar to return to the U.S., and threatens the credibility and functioning of the dollar’s global role.
Unsustainability of Dollar Hegemony
The global dollar system comprises onshore (U.S.-issued) and offshore (global) dollar stock, each contributing to flow and circulation. While offshore dollar issuance is limited, onshore supply remains the foundation.
Any breakdown in dollar circulation—whether insufficient liquidity support for external crises or weak return flows—risks undermining the system. U.S. bilateral and regional swap arrangements (e.g., Chiang Mai Initiative) can help but also serve as alternative systems—eroding dollar dependency.
Ultimately, as onshore dollars increasingly fail to return and offshore flows retreat, circulation weakens and depletion begins.
New financial instruments like crypto could temporarily insulate the dollar system, but they lack the ability to restore traditional settlement infrastructure—raising risk elsewhere.
Dollar hegemony, born under historic circumstances, now faces internal fragility and external pressures. It is on a path toward inevitable decline—not necessarily replaced by another hegemonic currency, but perhaps by a fundamentally different, non-hegemonic monetary regime.