Mao Zedong, the leader of communist China, wasn’t an economist, but his famous quote, “Power grows out of the barrel of a gun,” can help us understand why the US dollar is so powerful—and why it will likely stay that way. Just like military power, currency power is connected to a nation’s strength. Throughout history, the most dominant currency has often belonged to the world’s leading military force.
Take Britain, for example. When its empire was at its peak, controlling vast lands across the globe, the British pound was the leading global currency. Similarly, when the Roman Empire ruled much of the ancient world, its currency, the silver *Denarius* and gold *Aureus*, were the most powerful. This shows us that a country’s currency often mirrors its global power, and military might plays a big role in that.
But here’s where it gets interesting: while China is growing more powerful, that doesn’t mean its currency, the renminbi (RMB), will replace the US dollar anytime soon. The dollar is like the English language in international finance—it’s used everywhere, and it’s deeply embedded in the global system. That’s due to something economists call “network effects.”
What are network effects?
The more something is used, the more valuable it becomes to use it. The dollar is used in so many places for international trade, savings, and investment that it’s really hard for any other currency to take its place. Think of it like a giant web: the more people use it, the stronger and more widespread it becomes, and the harder it is to untangle yourself from it.
The US dollar also benefits from other factors. The US has a strong and trustworthy legal system, deep financial markets, and a global cultural influence that few other countries can match. Together, these make the dollar the go-to currency for many countries. On top of that, it’s incredibly easy to use and exchange dollars for other currencies. This “convertibility” makes it the preferred choice for international business.
Even though the US economy only makes up about a quarter of the global economy, the dollar accounts for 60% of all foreign exchange reserves (the money countries keep in case of economic trouble). Almost 90% of global currency exchanges involve the dollar in some way. That’s a huge difference from other currencies, including the Chinese renminbi, which makes up only 2% of global reserves.
The dollar has lost a little ground over the past 20 years, but it’s worth noting that it hasn’t lost ground to any serious rivals like the renminbi. Instead, it’s been challenged by currencies like the Canadian and Australian dollars—currencies of US allies. The euro and the Japanese yen, also freely exchangeable, are in the same category, posing no serious threat to the dollar’s dominance.
One thing that could potentially shake up the dollar’s status is the way the US has started to use it as a weapon. Recently, the US has frozen the foreign currency reserves of countries like Russia, Iran, and Venezuela as a form of punishment. This “weaponization” of the dollar could make other countries wary of relying too heavily on it. After all, no one wants to lose access to their money.
However, shifting away from the dollar is not easy. To do so, countries need to invest in other currencies—and there aren’t many good alternatives to the dollar right now. Most of the countries that issue reserve currencies, like the euro and yen, have supported the US when it has imposed sanctions. So, switching to other currencies doesn’t really solve the problem of being sanctioned.
As for the renminbi, China has made some progress in getting more countries to use it for trade. By mid-2024, 27% of China’s trade was settled in renminbi, up from 17% just two years earlier. But much of this increase is due to China’s trade with Russia, which now almost entirely uses the renminbi.
Yet, despite its tensions with the US, even China hasn’t fully abandoned the dollar. China still holds about 40% of its foreign exchange reserves in US dollars—around $1.4 trillion worth of US assets. That’s not exactly a small amount!
While some countries may be uncomfortable with the US dollar’s dominance, it’s unlikely to change anytime soon. The US remains a global superpower, and currency dominance shifts very slowly over time. As long as the US maintains its military power, reliable alliances, and a strong economy, the dollar will likely stay on top for the foreseeable future.
So, while the global landscape might evolve, the greenback isn’t going anywhere anytime soon.
