Dollarization vs. De-dollarization

Writing: Zhou Ziheng

The Essence of Dollarization Phenomenon and the Source of Currency Value

Dollarization (dollarization) refers to the dominance of the US dollar in international trade, reserves, and financial transactions. This system is not based on the intrinsic value of the dollar itself, but stems from its mandatory demand as the world’s primary reserve currency and medium of exchange. The dollar, as a legal tender, is essentially made of cotton and linen fibers, lacking backing by gold or other tangible assets; its value mainly derives from external coercive forces and market demand.

To illustrate with a simple analogy: suppose a common daily item (like a pen) originally has a market value of $5. If the government mandates it to be the sole producer and supplier, requiring all citizens to hold this item or face legal penalties, demand will sharply increase, causing prices to soar. The dollar system is similar: the U.S. government enforces the use of dollars domestically through taxes, debt repayment, and regulatory requirements. At the international level, through oil trade (the petrodollar system) and reserve demands, it creates a continuous absorption of dollars globally.

The petrodollar system began in the 1970s when the U.S. reached agreements with oil-producing countries like Saudi Arabia to price and settle oil in dollars. In return, the U.S. provided security guarantees. This arrangement made countries importing oil hold dollars, forming a cycle: oil-exporting nations earn dollars and often invest in U.S. Treasury bonds, further strengthening dollar demand. Central banks also hold dollars as major reserve assets, maintaining liquidity advantages.

However, this value is not eternal. Once demand weakens, the dollar’s purchasing power declines, leading to higher import costs, increased inflation pressures, rising interest rates, and real wages lagging behind living costs, ultimately eroding the living standards of ordinary people.

De-dollarization Process: Definitions, Drivers, and Latest Developments

De-dollarization is a gradual process, not a sudden event, referring to countries reducing reliance on the dollar in trade settlement, reserve holdings, and financial systems, shifting toward local currencies, gold, or other alternative assets. This trend accelerated after the 2022 Russia-Ukraine conflict and continues to evolve.

By early 2026, the value of global central bank gold reserves has surpassed U.S. Treasury bonds, becoming the largest reserve asset. Central bank gold holdings amount to about $4 trillion, slightly higher than the $3.9 trillion in U.S. Treasuries. This marks a reversal not seen since the mid-1990s. The share of gold in central bank reserves increased from about 5% in 2015 to approximately 24%, while U.S. Treasury holdings decreased from 33% to around 21%. This shift reflects a move of demand from dollar assets to physical assets.

Main driving factors include:

The weaponization of the dollar: In 2022, Western sanctions against Russia froze hundreds of billions of dollars in foreign exchange reserves (mainly dollar assets). While aimed at exerting pressure, it sent a signal worldwide: holding dollar assets may entail political risks and can be frozen with a single click. Russia responded by shifting to gold and other non-dollar assets, accelerating diversification. Similar sanction logic has appeared in other geopolitical conflicts, further eroding trust.

U.S. fiscal irresponsibility: The U.S. federal government’s fiscal deficit continues to grow. In fiscal year 2025, revenue was about $5.3 trillion, expenditures about $7.1 trillion, with a deficit of approximately $1.8 trillion. The 2026 fiscal year deficit is expected to reach $1.9 trillion, gradually expanding to $3.1 trillion over the next decade. The national debt exceeds $39 trillion, with interest payments becoming a major burden—net interest costs are projected to surpass $1 trillion in 2026. Ongoing borrowing relies on foreign buyers, but weakening demand forces the Fed to create money to fill the gap, increasing the risk of dollar depreciation.

Federal Reserve monetary policy: Large-scale money issuance dilutes the dollar’s value. Foreign investors purchasing U.S. Treasuries see principal and interest returned in depreciated dollars, reducing real returns. This prompts reserve managers to seek alternatives.

These factors combined have shifted de-dollarization from defensive measures to proactive strategies. IMF data shows that the dollar’s share in global foreign exchange reserves has fallen from about 71% in 1999 to below 58%, with gold absorbing part of the redistribution.

Shift in Central Bank Reserve Structures: Rise of Gold and Decline of Treasuries

Central bank actions are the most direct indicators of de-dollarization. Since 2022, central banks have purchased over 1,000 tons of gold annually for multiple years, far exceeding the 2010–2021 average of 473 tons per year. Although purchases dipped slightly to 863 tons in 2025, the momentum remains strong. In February 2026, net additions reached 19 tons, showing resilient demand.

Main buyers include China, Russia, India, Brazil, Turkey, and other countries. China’s PBOC has increased gold holdings for consecutive months, with official reserves surpassing 2,300 tons. Brazil sold $61 billion worth of U.S. Treasuries in 2025 and doubled its gold holdings. Russia sold all U.S. Treasuries after sanctions and increased gold reserves by 915 tons.

This shift is driven by gold’s “counterparty risk-free” attribute: it is not a liability of any government, cannot be frozen under a single jurisdiction, and cannot be infinitely printed. In contrast, demand for U.S. Treasuries faces structural pressures. Foreign official holders are shifting toward short-term Treasury bills or diversified assets, while gold prices repeatedly hit record highs in 2025–2026, partly supported by this demand.

Analysts see this crossover as the beginning of a multipolar reserve reality, not the collapse of the dollar. The dollar still dominates global trade settlement, but diversification is a clear trend. About 43% of central banks plan to further increase gold holdings by 2026.

De-dollarization in Global Trade: Bilateral Agreements and Energy Market Evolution

Although the dollar remains the pricing currency for most global trade, the proportion of local currency settlement is rising. BRICS countries (Brazil, Russia, India, China, South Africa, and expanded members) are key drivers of this process.

In China-Russia bilateral trade, over 95% is settled in renminbi and rubles, approaching 99% at times. Russia conducts 90% of its trade with BRICS partners in local currencies. In cross-border trade, China’s renminbi settlement ratio has risen from a low level in 2010 to about 53%. Brazil and China have reached a renminbi–real settlement agreement covering some bilateral trade. India and Russia’s energy trade uses rubles or rupees; Indian refineries in 2026 settle some Russian crude oil in renminbi and dirhams.

Energy is especially critical. Historically, nearly 100% of oil trade was dollar-denominated; currently, about 80% remains so, but 20% of transactions are shifting to non-dollar currencies. China, as the largest oil importer, promotes the “petro-yuan” initiative. Iran has demanded the use of renminbi for transit fees through the Strait of Hormuz, with some tankers bypassing the dollar. Oil-producing countries like Saudi Arabia are exploring contracts settled in renminbi, though on a limited scale.

These changes are not overnight replacements but gradual erosion of dollar share. Alternative payment systems like China’s CIPS, Russia’s SPFS, and the proposed BRICS payment mechanism are building parallel infrastructure. Projects like mBridge test cross-border local currency energy settlements. While a unified BRICS currency has not yet emerged, local settlement reduces transaction costs and exchange rate risks, and diminishes reliance on SWIFT.

U.S. sanctions sometimes backfire: financial isolation of Russia prompted adaptation, accelerating de-dollarization. Similar dynamics are observed in Iran, where oil revenues no longer automatically flow into U.S. debt but are used to buy Chinese goods, creating new cycles.

Analysis of De-dollarization’s Impact on the U.S. Economy and Global Influence

If de-dollarization continues, it will impact the U.S. through multiple channels:

Reduced demand and dollar depreciation: declining foreign demand for dollars and Treasuries will raise borrowing costs. Rising Treasury yields will increase government interest expenses and ripple into mortgage, auto, and corporate financing. With debt reaching new heights in 2026, interest payments are already a heavy burden.

Inflation and living costs: a weaker dollar makes imported goods (energy, consumer products) more expensive. Wages often lag, reducing real purchasing power and lowering living standards. Although the U.S. is a net energy exporter and somewhat buffered, global supply chains remain affected.

Investment and financial markets: low-interest-rate environments may end. Stock and bond markets could become volatile, affecting pensions and savings returns. Demand for hard assets like gold may rise further, diverting capital.

Globally, de-dollarization promotes a multipolar financial system. Developing countries reduce exposure to single-currency risks, aiding trade diversification. However, in the short term, it may increase exchange rate volatility and transaction frictions. Fragmentation in energy markets could lead to price instability, impacting global economic growth.

Not all analyses see this as catastrophic. The dollar’s advantages—deep financial markets, rule of law, network effects—remain. De-dollarization is more a gradual adjustment than a collapse. IMF data shows the dollar’s declining share is mainly due to valuation effects and diversification, not massive sell-offs.

Implications for Individuals and Families: Risk Management Strategies

In the context of de-dollarization, risks of currency depreciation and inflation rise. Diversifying assets becomes a rational choice. Gold, favored by central banks, offers hedging: it is not controlled by any government and preserves value in uncertain times. Physical gold, gold ETFs, or mining stocks can be considered, but factors like liquidity, storage costs, and regulation should be evaluated.

Additionally, holding multi-currency assets, investing in productive physical assets, or using inflation-hedging tools (such as certain commodities) can help buffer purchasing power erosion. Long-term, improving skills and increasing income sources are more important than relying solely on currency. Policymakers should focus on fiscal sustainability; otherwise, external pressures will amplify domestic challenges.

De-dollarization reflects a reconfiguration of the global geopolitical economy. The evolution of the dollar’s status will depend on U.S. fiscal discipline, diplomatic restraint, and competitive innovation. The process is slow but irreversible; participants should base strategies on factual data rather than panic. This shift may ultimately lead to a more balanced international monetary system, but transitional uncertainties will test countries’ adaptability.