US President Donald Trump seems to believe that the BRICS nations have been conspiring to replace the US dollar as the reserve currency of the world. At least, that is part of his peeve against India. However, there is no such conspiracy in reality, not even a likelihood of a concrete move in that direction.
Currently, the biggest threat to the dominance of the US dollar are the actions of the American government. America’s policies are both weakening the dollar and nudging other countries into using non-dollar currencies for select international transactions.
Why is the dollar the reserve currency of the world? Partly, it is because the US is the largest economy in the world. American policies on trade and finance have been liberal to the rest of the world. It is also because America’s macroeconomic management has been sound, particularly on stable inflation. Additionally, there has been a great degree of global trust in the US economy as well as its policies. The US has been its biggest beneficiary. American citizens have been able to live “beyond their traditional means” because other countries willingly finance their ever-expanding debt. And, needless to say, it also gives the US a great degree of power and authority over the global economic and financial system.
Today, America may take all of this for granted, but it takes decades of establishing credibility to ascend to this position. Soon, China may overtake the size of the US economy, but the probability of the Renminbi becoming the world’s reserve currency is low, as China’s economy is neither based on a free market nor does it run transparently. Beijing has manipulated its currency for a long time. There simply isn’t any trust factor with China and its currency that lies with the US and its dollar.
None of the other BRICS countries is anywhere near large or significant enough to offer an alternative to the dollar. The probability of a common currency in a grouping, which has such divergent economic and political interests is close to zero.
Also read: US officials know that New Delhi can’t be coerced. India thinks it’s an equal partner
Uncertainties all around the globe
The probability of America’s recent policy actions seriously undermining the dollar is non-trivial. For the first time in almost 100 years, the imposition of tariffs has made trade with America very uncertain for almost all countries in the world. Some countries are retaliating, which will affect US trade with the rest of the world.
Tariffs will also lead to inflationary pressure and raise inflationary expectations in the US, which will also erode confidence of the dollar. Then there is the issue of the Federal Reserve’s independence. Trump has made no secret of his displeasure with Chair of the Federal Reserve, Jerome Powell, who, ironically was appointed by the same President in his first term. Trump has tried to fire a member of the board, only to be stalled by the courts. He intends to pack the Board with loyalists when the time and opportunity arise.
This is very damaging to the credibility of the American system. The Federal Reserve has always been independent and has done a good job of keeping the macroeconomy stable, particularly inflation. Even a perception of the loss of independence, which could happen when Powell leaves next year at the end of his term, could permanently damage the credibility of an institution, which, in a way, underwrites the dollar’s strength.
Overall, the sheer unpredictability that has been ushered into economic policymaking in the US is a sharp reversal of the predictability that characterised it for several decades. The uncertainty is making stakeholders nervous.
The stress is evident. In the first six months of 2025, the dollar suffered its worst performance in 50 years against a basket of currencies, declining by more than 10 per cent. Central banks around the world are rushing to build up their gold stocks. The record high in gold prices— an almost 40 per cent rise in 2025—is in no small part due to Central Banks becoming major buyers of gold. Obviously, investors also flock to gold in times of uncertainty. Interestingly, this time, in extreme uncertainty, silver has also rallied (around 45 per cent in 2025). People are looking at alternatives to the dollar.
For now, there is no ready alternative in the form of a currency because China cannot be trusted, Europe is in decline, Japan is still stagnant, and India still rising. So, the dollar isn’t fading away. But when history is written, the beginning of the end of the dollar’s dominance will be dated circa 2025.
The author is the Chief Economist at Vedanta. His X handle is @nayyardhiraj. Views are personal.
(Edited by Saptak Datta)