Global Instability because of De-dollarisation

Introduction

In 1944, the US dollar became the world’s primary reserve currency under the Bretton Woods Agreement. Since then, the United States has enjoyed what economists describe as the “exorbitant privilege” of issuing the dominant global currency. However, in recent years, this dominance has come under increasing pressure as countries pursue de-dollarisation strategies. While often framed as a means of reducing dependence on the United States, these efforts may generate significant risks for global economic and geopolitical stability. 

This essay argues that widespread de-dollarisation could produce three major consequences: the emergence of a power vacuum in the international financial system, heightened risks of global economic contraction, and the weakening of sanctions as a key instrument of non-military political coercion.

De-dollarisation

Investopedia defines de-dollarisation as the process of moving away from the world's reliance on the US dollar as the chief reserve currency [Bromberg, 2025]^[1]. A reserve currency is a foreign currency held by a government or central bank as part of a country's reserves for use in an emergency [The Economist, n.d.]^[2]. At present, the US dollar remains the primary global reservIssuing the global reserve currency confers several substantial economic advantages. 

The advantages of issuing the reserve currency

Issuing the global reserve currency confers several substantial economic advantages. First, it reduces transaction costs in international trade, as many global transactions are conducted directly in the issuing country’s currency [Radcliffe, 2021]^[3]. This lowers exchange-rate frictions and enhances economic efficiency, indirectly supporting government revenue and fiscal capacity. 

Secondly, issuing countries do not face the same risk in exchange rates. This is due to the fact that they don’t have to withdraw debts in other dominant currencies to trade, which means there is no risk of the dollar depreciating against the currency the debt is registered in which would make it more expensive to pay back [Nelson & Weiss, 2022]^[4]. 

Finally, the high demand for US dollars to be held in reserve allows a constant global demand for US treasury bonds. This high demand depresses bond yields, allowing the US government to borrow money at a far lower interest rate than any other nation [Radcliffe, 2021]^[5]. Collectively, these advantages underpin the economic foundations of US financial dominance.

Weaponisation of the reserve currency

About half of global transactions are carried out in the dollar as of 2022 [Nelson & Weiss, 2022]^[6], which gives the United States significant power and the ability to use financial tools as a form of “coercive diplomacy” through non-military means [Norrlöf, 2023]^[7]. This allows whichever country that issues the reserve currency to police the globe according to their foreign policy aims. These aims may be seeking global peace or profit, however, no matter the goal, it can be achieved through weaponising the reserve currency. The US can do this by imposing sanctions like  freezing assets or excluding countries from the SWIFT payment system.

The impacts of sanctions by the US 

As the term “sanctions” encompasses a wide range of measures, this section focuses on three of the most prominent tools used by the United States: asset freezes, exclusion from the SWIFT payment system, and trade embargoes.

The process of freezing assets involves temporarily restraining them so they cannot be accessed by the individual, organisation or country while a legal review is underway [Lawqora, 2024]^[8]. A few immediate impacts of asset freezes generally include a loss of confidence amongst consumers and investors which can lead to high market volatility and a possible devaluation of the currency [FasterCapital, 2025]^[9].

Similarly to freezing assets, excluding a country from the SWIFT network targets the mobility of money flow and transactions. SWIFT (Society for Worldwide Interbank Financial Communication) is a network which banks utilize in order to communicate the details of transactions with each other. It is vital to understand that SWIFT is not used to transfer money between banks but rather to transmit the details of transactions which are to be carried out. By being excluded from SWIFT, banks lose the automation of the network which now requires the bank to manually intervene when sending transaction details. This requires time and effort unlike using SWIFT which significantly raises transaction costs for a country in turn, resulting in the loss of large amounts of money each year.

On the other hand, embargos are very different to freezing assets and exclusion from SWIFT as it involves a complete ban on trade or other commercial activity with a specific country or organisation. Throughout history, embargos have seen limited success in changing the politics of a country shown by how the ongoing 1962 embargo of Cuba has still failed to remove the communist party from power [Mcwhinney, 2025]^[10]. However, embargoes have a much more effective history of punishing the target country with the 1973-1974 oil embargo on the US and other countries which supported Israel leading to a significant rise in oil shortages and prices throughout the world [Office of the Historian, n.d.]^[11]. While the oil embargo punished the target countries, it did not end US support for Israel showing that embargoes are effective in punishing countries but not bringing about a change in policy.

Evidence of de-dollarisation efforts

There is significant evidence to show efforts by countries to distance themselves from the US dollar, specifically, BRICS countries. For example, in 2023, China formalized trade agreements with both Brazil and Argentina to trade in their respective currencies [The Straits Times, 2023]^[12] , [Wong, 2023]^[13] . Russia has also acted as a significant player in de-dollarisation shown by how they made similar agreements with Iran and India to trade in their own currencies [Siddiqui, 2024]^[14] , [Kool, 2023]^[15].

The reasons de-dollarisation may cause global instability

Firstly, the end of dollar dominance may lead to a power vacuum. Competition to fill this void will be rife, with countries such as China and possibly the EU fighting to emerge as the new superpower. However, none of these agents can currently replace the US dollar. China’s markets are too tightly controlled, the EU lacks political unification and safe haven markets such as Japan and Germany are simply too small. As a result, there will be no single “safe” asset for banks to hold causing panic as organisations scramble for financial security which can increase currency volatility and disrupt global trade agreements. Moreover, this may fragment the world into rival financial blocs being based on different currencies such as the Euro or the Chinese Yuan [Snower, 2025]^[16]. Historical episodes of monetary fragmentation suggest that competing economic blocs can increase geopolitical tensions, even if they do not directly lead to armed conflict. Consequently, this historical parallel suggests that the struggle for financial dominance could ignite comparable conflicts leading to an unprecedented loss of human life.

Moreover, geopolitical fragmentation will bring about massive macroeconomic consequences such as huge losses in global GDP. As a business portfolio changes to one of operation across multiple financial blocs, supply chains become inefficient due to the increasingly polarised legal requirements for exports, imports and business operations across multiple countries. These drastically different requirements result in a loss of revenue for businesses, alone this can be quite costly but globally, it severely affects GDP. The World Economic Forum predicts that future severe geopolitical fragmentation will bring about a loss of 5.5% regarding global GDP [Blake & Moynihan, 2025]^[17] , compared to Covid-19 only incurring a global loss of 3.4% [Statista, n.d.]^[18]. If such losses were sustained over time, they would substantially increase the risk of a global economic downturn, thereby undermining global stability.

Finally, another reason why the end of the dollar hegemony will bring about instability is the fact that there is no single global power which can impose sanctions on a nation. While sanctions have mixed results in preventing warfare, they are an excellent tool of punishing aggression and crippling economies. Due to the lack of a single global power, sanctions cannot easily exclude nations from international trade which may encourage more violence or undesirable actions as there are limited repercussions. Case in point, the US sanctions on Iran during the Iran-Iraq war severely limited Iran’s ability to wage war effectively shown by how they only had twelve functional helicopters at the end of the war compared to the 500 original ones [McCormack & Pascoe, 2015]^[19]. This example shows that sanctions can be effectively utilized to minimize the scale of conflicts, potentially saving lives. However, if the United States did not have the exorbitant privilege of the reserve currency, these sanctions would have been significantly less effective. Without the dollar's centrality, Iran could have bypassed the sanctions to procure the military equipment and parts needed to repair its army. Hence showing, the end of the dollar hegemony will bring about global instability as the world loses its metaphorical “policeman”.

Conclusion

To conclude, holding the exorbitant privilege of the reserve currency is not just a major economic advantage but the crutch of global stability. De-dollarisation efforts made by rival nations may seem advantageous in nature, however, will likely bring about major consequences as discussed above including but not limited to; a substantial power vacuum with potential for cold war era tensions, a global recession exceeding the Covid-19 pandemic, and a loss of a critical non-military coercion tool. The pursuit of this new order by major players such as China and Russia is both a tactical decision and a gamble, with global stability as a bet.

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2. The Economist. 2025. “The A to Z of Economics.” Accessed October. https://www.economist.com/economics-a-to-z.

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5. Radcliffe, Brent. 2021. “A Primer on Reserve Currencies.” Investopedia, February 23. https://www.investopedia.com/articles/economics/13/reserve-currencies.asp.

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10. McWhinney, James. 2025. “The Impact of Ending the U.S. Embargo on Cuba.” Investopedia, January 29.https://www.investopedia.com/articles/investing/022415/impact-ending-us-embargo-cuba.asp.

11. Office of the Historian. 2025. “Oil Embargo, 1973–1974.” Accessed October. https://history.state.gov/milestones/1969-1976/oil-embargo.

12. The Straits Times. 2024. “China, Brazil Strike Deal to Ditch Dollar for Trade.” November 22. https://www.straitstimes.com/world/china-brazil-strike-deal-to-ditch-dollar-for-trade.

13. Wong, Kandy. 2023. “Argentina to Settle Chinese Imports in Yuan as China Marches into South America to Dethrone US Dollar.” South China Morning Post, April 28. https://www.scmp.com/economy/global-economy/article/3218577/argentina-settle-chinese-imports-yuan-china-marches-south-america-dethrone-us-dollar.

14. Siddiqui, Huma. 2024. “India–Russia Strengthen Trade Ties with Focus on Local Currency Transactions and Economic Cooperation.” Financial Express, November 11.https://www.financialexpress.com/policy/economy-india-russia-strengthen-trade-ties-with-focus-on-local-currency-transactions-and-economic-cooperation-3662256/.

15. Kool, Tom. 2023. “Russia, Iran Officially Ditch U.S. Dollar for Trade.” OilPrice.com, December 27. https://oilprice.com/Latest-Energy-News/World-News/Russia-Iran-Officially-Ditch-US-Dollar-for-Trade.html.

16. Snower, Dennis. 2025. “Expert Comment: Is the Dollar’s Dominance Crumbling?” University of Oxford, November 3. https://www.ox.ac.uk/news/2025-11-03-expert-comment-dollar-s-dominance-crumbling.

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18. Statista. 2025. “Impact of the Coronavirus Pandemic on the Global Economy—Statistics & Facts.” Accessed October. https://www.statista.com/topics/6139/covid-19-impact-on-the-global-economy/.

19. Peace Science Digest. 2025. “Sanctions as a Tool for Peace.” Accessed October. https://warpreventioninitiative.org/peace-science-digest/sanctions-as-a-tool-for-peace/