The global south is losing faith in the United States Dollar (USD), according to a Bloomberg report for the New Economy Forum, which added that President Donald Trump’s decisions have further damaged the USD’s prospects.

It acknowledged that in terms of raw power — position as the world’s biggest economy and a formidable military — the dollar retains top backing. This is also evidenced in the various investments Donald Trump has elicited from countries and corporations.

However, drop in Dollars parked in global forex reserves, a key metric, shows that the Dollar may be on its way out as the world’s most dominant currency.

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Listing reasons due to which the world’s seems to be looking for alternatives aside from the dollar, the report said that wariness has increased as the US slapped tariffs on all countries — friends and foes alike, the White House continues to “bully” the Federal Reserve (Fed) — which is the US’ central bank, debt is rising, and the US has seen a number of pacts with Middle Eastern countries crumble.

In contrast, China has kept its exchange rate flexible, shaving off the need to hoard dollars, and the Gulf countries have directed billions towards infrastructure projects at home and riskier investments abroad — this removes their reliance on the US Treasury.

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As per the report, decline in dollar parked in global FX reserves paints a dismal picture. In noted that in the early 2000s, the USD accounted for over 70% of global FX reserves, now its below 60%. “If the euro area wasn’t so fragmented, and the Chinese financial system so closed, alternatives would be more attractive and the decline faster,” it added.

It further noted that lower support from China and the Middle East will cost the US, as it has “reliably recycled” close to $5 trillion of their savings into the debt market to cut borrowing costs by about half a percentage point. This has so far saved taxpayers billions on auto loans and mortgages and made it cheaper for US companies to invest in new ventures.

Now, however, China has stopped buying dollars and may in the future even start selling it. It said that while a gradual retreat would lead to slow increase in US rates, a rapid pullout could cripple the markets. For the Middle East, cheaper oil and megabillion projects closer home will leave little room for US bond inflows.

“Structural forces that kept the dollar high, US borrowing costs low and Treasury sanctions powerful are reversing. The consequences will be far-reaching,” it warned.

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• In 2005 future Federal Reserve Chair Ben Bernanke offered an explanation for a conundrum: Why did long-term rates keep falling even as the Fed hiked? His “global savings glut” hypothesis argued that surplus nations such as China and Gulf oil exporters recycled vast earnings into American debt, boosting demand and making life cheaper for US borrowers.

• Twenty years on, the dollar remains the world’s reserve currency, yet the dynamics are shifting. China’s reserves peaked at $4 trillion in 2014 but have since fallen to $3.3 trillion. The Gulf has accumulated almost $800 billion in trade surpluses since 2017, yet its reserves are flat.

• American assets no longer inspire the same confidence they once did. Government debt is high and rising. Washington slaps tariffs on allies and adversaries. Political brinkmanship leads to government shutdowns. The White House openly challenges its own central bank’s independence, raising fears of high inflation eroding the value of dollar holdings.

• The dollar was once a shield. Now it’s a sword. After Russia’s 2022 invasion of Ukraine, the US and allies froze $300 billion of Moscow’s assets. That step proved Washington is willing to use the currency for geopolitical leverage—a warning China and Gulf reserve holders can’t ignore.

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• Chinese and American interests are drifting further apart, fueling Beijing’s fears about the safety of its Western investments.

• In the Middle East, Israel’s strikes on Qatar are the latest example of the fraying of the “energy for security” pact that tied Gulf states closely to the US for decades.

• China’s rigid dollar peg once required massive Treasury purchases to stabilize its currency. Since the mid-2010s, Beijing has shifted toward a dirty float, with fewer interventions, which sharply reduces the need to hoard liquid dollar assets. China is also spearheading a shift away from the dollar in global trade, with emerging markets increasingly using local currencies. The yuan’s share in China’s trade invoicing surged to 25% in 2023, from just 2% in 2010.

• Current-account surpluses are shrinking as well, leaving less cash to recycle into global markets. China’s balance has plunged to 2.3% of gross domestic product in 2024, from almost 10% in 2007. In some oil states, the shift is more stark: Saudi Arabia flipped from lender to borrower.

• Soaring domestic spending is draining the petrodollar pool that the Gulf once invested abroad. Qatar poured $300 billion into preparing for the 2022 World Cup. Saudi Arabia may be committing more than $1 trillion to futuristic cities, sports and entertainment. And oil money once parked in safe US debt is now chasing riskier bets. With revenue squeezed and spending rising at home, Gulf sovereign wealth funds are steering capital into stocks, mines and real estate instead of simply lending to the US government.

• The era of easy foreign savings flowing into dollar assets, suppressing US borrowing costs and giving Washington a powerful sanctions lever, is moving slowly to a close. That points to higher rates ahead, making the US debt burden heavier, its investments at home more expensive and its policy choices abroad more restricted.

(With inputs from Bloomberg)

Key Takeaways

The U.S. Dollar’s dominance is challenged by rising geopolitical tensions and economic policies.Countries are increasingly seeking alternatives to the dollar, impacting global finance.Changes in foreign investments and reserve allocations signal a shift in currency reliance.