Anna's Deep Dives

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The Dollar’s Hegemony and Global Imbalances

The U.S. dollar sits at the center of international finance. This dominance, often called dollar hegemony, provides benefits to the United States. However, it also creates structural imbalances and vulnerabilities across the global economy.

Extent of Dollar Usage in Trade, Reserves, and Finance

As of April 2025, the U.S. dollar remains the world's primary reserve currency. Central banks hold approximately 58 percent of their foreign exchange reserves in dollars. This share has declined from 71 percent in 1999 and roughly 73 percent in 2001. 

Some forecasts predict a further drop to between 40 and 45 percent by 2050. The euro follows, accounting for around 20 to 22 percent of reserves. The British pound holds about 7 percent, and the Chinese yuan represents 4 percent. By 2023, 46 countries held more than 5 percent of their reserves in currencies other than the dollar.

The dollar's reach extends deep into global trade and transactions. It facilitates about 50 percent of all global transactions by value. Over half of all international trade invoices use dollars. The dollar features in 88 percent of all foreign exchange trades. It also backs 88 percent of the nearly $100 trillion in global swap and forward obligations. 

The long-standing petrodollar system, where major oil contracts price in dollars, reinforces this usage. Yet, shifts appear; about 20 percent of oil trades happened in other currencies in 2023. 

Bilateral trade between major economies like China and Russia increasingly bypasses the dollar. Their recent trade hit $240 billion, conducted mostly in yuan. By April 2024, over 90 percent of their commerce excluded the dollar, a stark change from 90 percent dollar usage in 2015. 

China actively promotes its currency, the renminbi (RMB). RMB use in China's cross-border transactions climbed from 30 percent to over 50 percent between 2016 and 2022.

In global finance, the dollar dominates banking and payment systems. It accounts for 45.6 percent of transactions on the SWIFT messaging network. However, the share of international bank claims denominated in dollars fell from 67 percent in 2016 to 55 percent by 2024. 

Non-U.S. banks hold over $10.3 trillion in dollar liabilities. This vast network allows the U.S. government and corporations to borrow funds at lower interest rates compared to other nations. Countries seeking alternatives challenge this structure. 

China reduced its holdings of U.S. Treasury securities from $1.3 trillion in 2014 to below $800 billion in 2024. Nations within the BRICS alliance (representing 45 percent of world population and 35 percent of global GDP as of October 2024) aim to trade more in local currencies through initiatives like BRICS Pay. Regional blocs like ASEAN also promote cross-border digital payment systems using local currencies.

Risks of Concentrated Exchange-Rate and Funding Pressures

Over-reliance on the dollar creates concentrated risks. Fluctuations in the dollar's value or changes in U.S. monetary policy send ripples worldwide. Developing nations feel these effects acutely. Many hold substantial debt denominated in dollars. A stronger dollar or rising U.S. interest rates increases their debt servicing costs. 

Public debt in these countries rose by 15 percentage points in recent years. Interest payments consume large portions of export earnings, hindering investment and growth. Zambia's 2020 default on its $35 billion debt illustrates these pressures, exacerbated by its reliance on dollar loans. 

Pakistan saw its currency value drop 150 percent against the dollar since 2018. Emerging markets often must react to Federal Reserve policy decisions. This limits their ability to set independent monetary policy tailored to local conditions. 

El Salvador's adoption of Bitcoin as legal tender in June 2021 highlights the complexities; it faced budget deficits over $40 million and an 11 percent drop in remittances shortly after.

Funding pressures also arise from dollar hegemony. Fears of dollar shortages surface periodically, particularly amid geopolitical tensions or concerns about U.S. political shifts impacting Federal Reserve support mechanisms. Access to trade finance, vital for global commerce (supporting $9.7 trillion in transactions), can become constrained or more expensive due to dollar volatility. 

Nigerian businesses, for example, struggle with high financing costs. The dollar's recent fluctuations reflect these pressures. It depreciated 6.25 percent since January 2025, trading at $1.10 per euro by April 2025. 

Concerns about U.S. tariffs (reaching up to 145 percent on some Chinese goods) and a potential economic slowdown contribute to this trend. Such U.S. policies create global imbalances, evidenced by the persistent U.S. trade deficit ($1.1 trillion total in 2023, $295 billion with China in 2024).

Countries actively seek ways to mitigate these risks. China works to reduce its $1.1 trillion external dollar debt exposure by promoting the renminbi. Argentina adopted a "dirty float" exchange rate system for its peso. It ranges between 1,000 and 1,400 pesos per dollar, potentially requiring a 23 percent devaluation, supported by $15 billion from the IMF. 

Regional initiatives like the Pan-African Payment and Settlement System aim to use local currencies, stabilizing exchange rates within the continent. The potential decline of dollar dominance also poses risks for the U.S. 

A reduced global role could increase U.S. borrowing costs. One estimate suggested a potential 57 percent drop in U.S. incomes if these costs rise sharply. The entire system faces pressure, demanding adaptation and potentially new cooperative frameworks.

Recurring Financial Crises and Liquidity Gaps

The current global financial system exhibits a tendency towards instability. Recurring crises erupt, often causing widespread economic damage. Furthermore, the system struggles to provide sufficient liquidity, especially to vulnerable nations, during times of stress. These limitations highlight fundamental weaknesses in the existing architecture.

The 2008 Global Financial Crisis and IMF’s Response

The 2008 Global Financial Crisis stands as a stark reminder of systemic vulnerability. It originated in the U.S. housing market. Banks engaged in risky lending practices. They issued subprime mortgages to borrowers with poor credit histories. As the housing boom inflated, average U.S. mortgage debt per household climbed. It rose from $91,500 in 2001 to $149,500 by 2007. 

When interest rates rose and borrowers began defaulting, the bubble burst. Home prices plummeted around 43 percent by 2009. Millions lost their homes.

The crisis rapidly spread through the financial system. Complex financial products like mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) amplified the losses. These securities, once highly rated, became toxic assets as underlying mortgages failed. 

The crisis climaxed on September 15, 2008. Lehman Brothers, a major investment bank, filed for bankruptcy. Panic gripped financial markets. The S&P 500 stock index ultimately fell 57 percent from its October 2007 peak to its March 2009 low. 

The crisis triggered a deep global recession. Unemployment in the U.S. soared to 10 percent. The nation lost 8.8 million jobs. Historical data shows such crises often cost nations an average of 23 percent of GDP over four years.

Governments and international institutions scrambled to respond. The U.S. government launched the $700 billion Troubled Assets Relief Program (TARP). TARP aimed to stabilize banks and financial markets. 

The International Monetary Fund (IMF) also stepped in. It boosted its lending capacity significantly, adding SDR 284 billion (Special Drawing Rights). The IMF provided financial assistance to numerous countries hit hard by the crisis, including European nations like Ireland and Greece. 

In the aftermath, regulators implemented reforms like the Dodd-Frank Act in the U.S. This act aimed to increase bank safety, requiring stress tests for banks holding over $50 billion in assets. Despite these reforms, concerns persist about systemic risks, including those posed by the less regulated "shadow banking" sector.

SDR Allocations in 2021 and Their Impact

The COVID-19 pandemic presented another global shock. In August 2021, the IMF responded with its largest-ever allocation of Special Drawing Rights. It distributed SDRs equivalent to $650 billion to its member countries. 

This action aimed to bolster global liquidity. It helped countries strengthen their foreign exchange reserves without adding to their debt burdens. By 2025, total SDR allocations reached SDR 660.7 billion, valued at approximately $943 billion.

The 2021 allocation provided crucial support. Emerging market countries received about 42.2 percent of the funds. This liquidity helped many avoid debt distress. Countries like Sri Lanka and Ecuador saw their reserves increase by 28 percent and 18 percent, respectively, after converting SDRs to hard currency. 

However, the distribution mechanism revealed inherent inequalities. Advanced economies, particularly the G7 nations, received roughly 40 percent of the allocation due to their larger IMF quotas. Developing nations received only 35 percent. This fell far short of their estimated financing needs, pegged at over $450 billion every five years for low-income countries alone.

Despite the historic size of the allocation, significant liquidity gaps remained. Around 60 percent of low-income countries were still considered in or at high risk of debt distress after receiving SDRs. Half of low-income countries and over a third of middle-income countries reported the allocation was insufficient. 

Experts estimated the total global financing shortfall at $2.5 trillion. This led to calls for wealthier nations to reallocate their SDRs to countries in greater need. The IMF facilitated plans to channel about $100 billion of SDRs to vulnerable nations through its Poverty Reduction and Growth Trust and the Resilience and Sustainability Trust. 

Concerns linger, however, about potential conditions attached to these reallocated funds. The 2021 SDR allocation marked a vital intervention, but it also highlighted the limitations and distributional inequities of the current system.

COVID-19 Liquidity Injections and Uneven Access

Governments and central banks worldwide unleashed unprecedented liquidity injections during the COVID-19 pandemic. The G20 nations alone pledged over $5 trillion for economic relief efforts. Central banks slashed interest rates and launched massive asset purchase programs. 

The U.S. Federal Reserve cut its benchmark rate to near zero (0-0.25 percent). It backed a $2.2 trillion aid package. The European Central Bank (ECB) expanded its asset purchases to around €1.35 trillion. It also launched the Pandemic Emergency Purchase Programme (PEPP), worth €1.35 trillion, aiming to boost Eurozone GDP by 1.3 percentage points. Germany offered up to €750 billion in support. The Bank of Korea injected 14.1 trillion won (about $9.8 billion).

International organizations also contributed. The International Finance Corporation (IFC) mobilized $4 billion to support businesses in developing nations. The IMF provided $1 trillion in overall financial support to its 190 member countries throughout the pandemic crisis. 

These massive injections helped stabilize financial markets and support economic activity. India’s central bank strategies contributed to an average growth rate near 8 percent over three years following the initial shock.

However, the crisis and the response exposed deep inequalities. Access to financial support was uneven. Existing mechanisms like bilateral swap lines often bypassed emerging markets. Health disparities were stark: 4.5 billion people lacked access to essential health services in 2021. 

Vaccine distribution showed vast inequities, with high-income countries achieving 74.1 percent full vaccination compared to just 11.51 percent in low-income nations. Income inequality also worsened in some places; Sweden's Gini coefficient rose by 2.5 percent. 

Small and medium-sized enterprises (SMEs) struggled globally, often lacking the resources and data access to compete effectively. The pandemic highlighted the financial system's vulnerabilities, particularly within the non-bank financial sector. 

The ECB noted non-banks sold around €300 billion in securities during the market turmoil. Africa faces a staggering $1.3 trillion annual financing gap to meet Sustainable Development Goals by 2030. While liquidity measures were essential, the pandemic underscored the system's limitations in ensuring equitable access and addressing underlying vulnerabilities.

Emerging‑Market Stress and Currency Wars

Emerging market economies (EMEs) often find themselves exposed to external shocks. Their integration into the global financial system comes with unique challenges. Over-reliance on foreign currency debt and susceptibility to global economic shifts create persistent stress. This stress sometimes spills over into broader currency tensions.  

“Original Sin” and Over-reliance on Hard-Currency Debt

Many emerging economies suffer from a condition economists Barry Eichengreen and Ricardo Hausmann termed "original sin" in 1999. This refers to the inability of a country to borrow abroad in its own currency. Foreign investors often hesitate to lend in local currencies. They fear instability and the risk that the currency will lose value. Consequently, many EMEs must issue debt denominated in hard currencies, mainly U.S. dollars.  

This reliance creates significant risks. If an EME's local currency depreciates, the real burden of its foreign currency debt increases. This can trigger financial distress or even default. 

By the end of 2022, some progress was visible. Foreign investors held 26 percent of EME government securities, down from 35 percent in 2018. Countries like India, Brazil, and China reduced their foreign currency exposure. Yet, the problem persists widely. Argentina continues to struggle. 

Over 70 percent of Egypt's government debt remains denominated in foreign currency. Across low-income countries generally, 70 to 85 percent of debt is in foreign currencies.

EMEs are highly vulnerable to global capital flow volatility. When major central banks, like the U.S. Federal Reserve, tighten monetary policy, capital often flows out of emerging markets. This happened in 2022. Outflows lead to currency depreciation and rising borrowing costs (higher sovereign spreads) for EMEs. 

Countries with over 20 percent of government debt held by foreigners face particular risk. Political decisions can worsen instability. Mexico City's 2018 airport cancellation, for instance, triggered a 3 percent drop in the peso against the dollar. It contributed to a GDP decline between 3.3 and 4.5 percent, an estimated loss of $68 billion. 

Borrowing costs reflect this risk. Yields on hard-currency bonds from frontier markets reached 9.6 percent recently, with some exceeding 10 percent. High costs for hedging currency risk can add 6 to 7 percentage points to loan expenses. This makes crucial investments, like renewable energy projects, less feasible. Recent defaults in Ghana and Zambia underscore these dangers.  

De-risking, De-dollarization Pressures Among Middle-Income Economies

Middle-income economies increasingly pursue strategies to reduce their vulnerabilities. These strategies often involve "de-risking" and "de-dollarization." De-risking involves reducing reliance on dominant economic partners, particularly China. 

Countries seek to diversify trade relationships. ASEAN nations face a trade deficit exceeding $190 billion with China. Indonesia's textile industry lost 80,000 jobs in 2024, with projections of 280,000 more jobs at risk in 2025. Initiatives like the European Union's Global Gateway aim to offer alternatives. The EU plans to invest €300 billion by 2027 in emerging market infrastructure. 

De-risking also involves attracting diverse investments, often through innovative financing. Blended finance, combining public and private funds, gains traction for sustainable projects. The GAEA initiative mobilized around $200 billion for climate investments. Focusing on sectors like renewable energy in Sub-Saharan Africa is another de-risking approach, though financing access remains a hurdle.  

De-dollarization is the push to reduce dependence on the U.S. dollar in international trade and finance. This trend gained momentum among EMEs, spearheaded by the BRICS+ group. This bloc, holding 42 percent of global foreign exchange reserves in 2024, actively promotes using local currencies for trade. 

Geopolitical factors accelerate this shift. U.S. sanctions, like those freezing $300 billion of Russia's reserves in 2022, spurred efforts to find dollar alternatives. 

Central banks diversify reserves, increasing gold holdings. They purchased over 1,000 tons of gold annually in 2022 and 2023. China raised its gold reserves from 1.8 percent to 4.9 percent of total reserves since 2015. It simultaneously reduced its holdings of U.S. Treasuries. 

Despite this trend, de-dollarization faces obstacles. The dollar still dominates foreign exchange markets (featuring in 90 percent of transactions). It remains the primary invoicing currency in many regions (over 80 percent in ASEAN+3, 96 percent in the Americas). 

Acceptance of alternative currencies like the Chinese renminbi is growing but still limited globally. Significant dollar reliance persists. China held 50-60 percent of its reserves in dollars ($3.1-$3.29 trillion) as of 2023. Eurozone banks source about 17 percent of their funding in dollars. 

This interdependence means disruptions in dollar markets can still cause widespread harm. These pressures sometimes intersect with currency wars. Nations may devalue their currencies to gain trade advantages, leading to tensions. 

The U.S.-China trade war involved tariffs up to 145 percent and accusations of currency manipulation. China devalued its yuan to record lows in response. Such actions risk escalating into broader protectionism, harming global economic stability.

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Table of Contents

(Click on any section to start reading it)

I. Historical Foundations and the Imperative for Change

1.1 The 1944 Bretton Woods Conference

• Franklin D. Roosevelt’s vision and the role of John Maynard Keynes and Harry Dexter White

• Establishment of fixed exchange rates and gold‑dollar linkage

• Creation of the IMF and World Bank

1.2 Evolution and Unraveling of the Original System

• The “Nixon Shock” and end of dollar‑gold convertibility (1971)

• Transition to floating exchange rates and currency volatility

• Legacy institutions adapting to new realities

1.3 Contemporary Calls for a “Bretton Woods 2.0”

• Academic and policy proposals for a UN‑sponsored conference

• IMF Managing Director on “21st‑century multilateralism”

II. Evaluating the Limitations of the Current Financial System

2.1 The Dollar’s Hegemony and Global Imbalances

• Extent of dollar usage in trade, reserves, and finance

• Risks of concentrated exchange‑rate and funding pressures

2.2 Recurring Financial Crises and Liquidity Gaps

• The 2008 global financial crisis and IMF’s response

• SDR allocations in 2021 and their impact

• COVID‑19 liquidity injections and uneven access

2.3 Emerging‑Market Stress and Currency Wars

• “Original sin” and over‑reliance on hard‑currency debt

• De‑risking, de‑dollarization pressures among middle‑income economies

III. Reinventing Global Liquidity: SDRs and IMF Reforms

3.1 Anatomy of SDRs: Basket, Valuation, and Mechanics

• SDR composition: dollar, euro, renminbi, yen, pound 

• Interest‑bearing nature and allocation criteria

3.2 Recent SDR Allocations and Rechanneling Proposals

• USD 650 billion issuance in August 2021

• Multilateral trusts, concessional financing, and climate financing

3.3 IMF Governance Reform: Quota, Voting, and Representation

• Calls for quota realignment toward emerging powers

• Proposals to democratize decision‑making

IV. Challengers to the Dollar: BRICS, Regional Blocs, and Alternative Currencies

4.1 BRICS Cross‑Border Payment Initiative (BCBPI)

• Shift from dollar‑clearing to national currencies

• Technical architecture and political hurdles

4.2 Prospects for a BRICS Common Currency

• Basket‑based proposals akin to SDRs

• Divergent member interests and India’s stance

4.3 Regional Currency Arrangements: From RCEP to ECOWAS

• Lessons from the euro‑zone and African Monetary Union

• ASEAN’s payment integration efforts

V. Technological Catalysts: CBDCs, Digital Money, and FinTech Innovations

5.1 The Global CBDC Landscape

• 134 jurisdictions exploring CBDCs; 66 in advanced phases

• Wholesale vs. retail CBDCs: design trade‑offs

5.2 Interoperability and Cross‑Border Digital Rails

• BIS “mBridge” and the fate of multi‑CBDC platforms after U.S. withdrawal

• SWIFT alternatives and blockchain/DLT pilots

5.3 Risks and Governance of Digital Currencies

• Privacy, surveillance, and financial stability concerns

• Regulatory frameworks and standard‑setting by the IMF/BIS

VI. Designing a Multipolar Financial Architecture: Governance, Regulation, and Future Scenarios

6.1 Principles for a New Monetary Order

• Equity, transparency, and environmental sustainability

• Balancing sovereignty with global public goods

6.2 Institutional Frameworks and Rule‑Making

• Potential roles for the UN, IMF, World Bank, and new bodies

• Strengthening global financial safety nets

6.3 Scenario Analysis: Paths to Reinvention

• Gradual reform vs. disruptive overhaul

• Implications for emerging vs. advanced economies

• Roadmap for stakeholders: policymakers, central banks, and the private sector

Baked with love,

Anna Eisenberg ❤️