Is this the start of the end of Dollar & US hegemony ?? Implications for investors

 

Title : Is this the start of the end of Dollar & US hegemony ?? Implications for investors 

Hello friends

 

  This innocent looking table(Published in Economic Times this week) startled my mind & forced me to dig deeper . After digging deeper & doing some research through credible sources & AI tools , my earlier belief became stronger that “ This is the beginning of end of Dollar hegemony & consequently US hegemony & domination over global economy & markets” . Why do I say so? Just have  a closer look on the table & few observations.

·         Is US Fed losing confidence in its own currency ? Does it not consider its own creation US Treasury bills  as a “safe haven” ? Why US Fed has quadrupled its gold reserves in tons in last 8 years , increasing its Gold holding share to almost 80% of its reserves( highest among all big economies)? Does it know something about USD outlook which it is hiding ?

·        Why the developed world & US allies (Germany, Italy, France etc) hold Gold as the major reserve asset/ currency (>75%) ?  Do they not consider USD/T-bills as the safest haven asset?  Has Gold replaced USD/T-bills as the “safest haven”? Do they know something about USD outlook , which other nations don’t know?

·        Why Japan & China has hurriedly reduced their USD/ T bills holdings to half , by massive 1.7 Trill $ in 8 years ? Do they know something more than other nations about USD outlook?

·        Has Gold replaced USD/ T-bills as the safest haven ?  Central banks have been madly hoarding Gold in last decade or more .  Only these top 10 economies have hoarded average of 1000 tonnes of gold every year(@130 billion $ > 3% Indian economy size every year) . No wonder Gold has done so well in last 5 -10 years(15-18% CAGR), better than equities.

·        Why India is still over-invested into T-bills and under-invested into Gold(14% share only) with respect to US & developed nations? Should the RBI wake up and follow the US Fed & developed world ? Are we trying to be “ Holier than Thou” & impressing somebody in US ?

 

This wet my appetite as this will have implications on our investments, asset diversification  & their returns , which I will cover later…  I started digging more into this affair through AI tools like Chat Gpt , Google Gemini to get some credible data & deeper trends through credible sources.

 

·        Share of US treasuries in Global central bank treasuries  has dropped from 72% in 2001 to 62% in 2010 & 54 % now (that’s 18% drop in 24 years@ 0.75% per year) . By this rate , it will be less than 50%(no more majority of reserves) in 5 years(by 2031) and less than 40% in less than 20 years(by 2044) . See the declining trends(Source Chat GPT query)

 

·         While the share of US T-bills have fallen by 8% (from 62 to 54%) in last 15 years in central bank reserves, Gold holdings% has gone up by 6% (from 10% to 16%) .Has Gold replaced US T-bills as the “safest haven” ?No wonder, Central banks have been madly hoarding Gold in last decade or more . Only these top 10 economies have hoarded average of 1000 ton of gold every year(@130 billion $ at current prices). No wonder Gold has done so well in last 10 years(15% CAGR), much better than equities (Nifty at 12% & NYSE at 11% in 10 years). Pl see graph below(Source Chat GPT)

 

·        Foreign investor share of US Treasury holdings have reduced from 50% in 20008 to 30% in 2025 , including the major holders like Japan & China, which have almost halved their US T-bill holdings since 2017 by about massive 1.7 Trillion $ ( Pl refer the first table in the blog).

 

 

·        Even the share of USD in global transactions (trade , Forex and capital ones) have come down from 52% to 42% in 2 decades(2004 to 2022) , which is measured by SWIFT payments(inter bank transactions). This shows that share of Dollar/ T bills coming down for both reserve currency as well as transaction/ trade currency.

 

This led me to think & research more about USD outlook & its implications on our investments, asset diversification  & their returns. I had raised concerns about strength of US economy & USD earlier too in my blog recently (late September) with the headline.

 " Interesting Global marathon for economic & market power between 3 players - US , China & India" 

I am putting the blog link here ..

https://indiavalueinvesting.blogspot.com/2025/09/interesting-global-marathon-race-for.html

 

Putting some relevant portions from the blog on US economy & equity markets related concerns..

“For over a century, the U.S. economy has been the backbone of global growth and financial markets. Even today, it accounts for nearly 25% of global GDP and houses the world’s deepest & most liquid capital(bonds, T bills & equity) markets. 

 

•             Strengths: The U.S. thrives on its innovation engine — Silicon Valley, biotech hubs, green energy, and AI leadership. Consumer spending, which makes up about 70% of GDP, continues to power growth. Institutions remain strong, attracting global capital.

•             Challenges: The fiscal debt burden is climbing above 125% of GDP, demographics are aging, and productivity growth is uneven. Rising geopolitical competition also weighs on its long-term outlook. Other nations & central banks  are slowly but steadily moving towards de-dollarization & chosing Gold as the safest haven, instead of USD/ T Bills in earlier times , which could challenge the Dollar status as world reserve currency. Another big risk is heavy concentration of market growth in a handful of large tech companies, often referred to as FAANG or the "Magnificent Seven". The top 10 stocks, primarily tech giants, can represent over 37% of the S&P 500's total value. The "Magnificent Seven" (Google, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) have driven a majority of the S&P 500's gains in recent years. This creates a scenario where if these stocks perform well, the index looks healthy, even if the other 493 companies are struggling. This masks broader economic weakness.” Magnificent seven stocks are mainly going up , based on their AI related investments and earnings projections ( accounting for >50% of market cap gains of S&P 500 this year )and hence their could be a bubble/ over-hype  situation , if  they don’t deliver on AI projections.”

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US Dollar as a Global Reserve Currency

The USD remains the preeminent reserve currency, comprising approximately 54% of disclosed global official foreign reserves as of 2025, far surpassing the Euro (≈20%) and others. However, its share has been on a gradual, long-term decline from a peak of 72% in 2001 to 54% now & probably less than 40% in next 20 years( as per the current trends).

Key Long-Term Risks to Dominance (Erosion of Trust)

• US Fiscal Health: The biggest structural risk is the US's growing national debt(at 38 Trillion $@125% of GDP) and persistent fiscal deficits (projected at ≈6.5% of GDP). This can undermine the "safe haven" status of the USD and US Treasury securities, potentially leading to a higher cost of borrowing or a weaker dollar if the Federal Reserve is compelled to intervene.
• Diversifying central bank reserves: Growing concerns on dollar stability & US fiscal health has led to central banks reducing their USD/ T-bill holding from 72% to 54% (last 24 years) and increasing their other categories (primarily Gold @16% and Euro@20% share)
• Weaponization of the Dollar: The use of financial sanctions (e.g., against Russia) has prompted some countries, particularly strategic rivals and certain emerging markets, to actively seek alternatives for trade and reserves to reduce their vulnerability.
• BRICS challenge – As of 2025 , 10 BRICS countries( Led by Brazil , Russia, India , China , South Africa) & 13 partner nations are developing the BRICS Bridge payment network to settle transactions using Central bank digital currencies. This might become a big challenge to USD hegemony in future.
• Political Instability: Increased political polarization and recurring issues like debt limit confrontations in the US ( leading to current US Fed govt shut down) can raise doubts about the stability of US governance, which is a core pillar of the dollar's credibility.

 

 

Key Factors Supporting Dominance (Structural Advantages)

• Deep and Liquid Markets: The sheer size, openness, and sophistication of US financial markets (equities and bonds) are unmatched globally. This provides the world with a vast supply of safe, liquid, dollar-denominated assets, which no other currency can currently rival.
• Network Effects: The dollar's dominance is deeply entrenched in the global financial architecture (banks, clearinghouses, and payment systems). The cost and institutional shift required for countries to fully divest are prohibitively high, creating a strong inertia that favors the USD.
• Lack of a Viable Alternative: The decline in the USD's share has not led to a corresponding surge in a single competitor ,like the Euro or the Chinese Renminbi( which currently holds only ≈2% of reserves). Instead, reserve managers are increasingly diversifying into Gold(from 10% to 16% in last 15 years) & a wider range of smaller, "nontraditional" currencies (e.g., Australian Dollar, Canadian Dollar).
• Rule of law and institutional depth: US legal, regulatory and financial infrastructure (settlement, custody, accounting standards) Favors USD usage.

 

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🌍 US Dollar as a Global Trading Currency

The USD's role as a medium of exchange and unit of account in international trade is also likely to remain dominant but face gradual erosion from de-dollarization efforts and technological advancements. Share of USD in global transactions (trade , Forex and capital ones) have come down from 52% to 42% in 2 decades(2004 to 2022) , which is measured by SWIFT payments(inter bank transactions). Hence, it has already lost its majority share(>50%) of all SWIFT transactions(Trade related, Forex deals & capital flows)

 

Factors Causing Erosion

• Commodity Pricing: There is a visible, growing trend of commodity contracts, particularly in energy, being priced in non-dollar denominations as countries like China and Russia push for alternatives.
• Regional Trade Blocs: A global shift towards greater geo-economic fragmentation and the formation of regional trade blocs could lead to more trade being invoiced in the currencies of the dominant regional economies, diminishing the USD's role.
• Digital Currencies (CBDCs): While private cryptocurrencies like Bitcoin are not seen as a threat to reserve currency status, the development of Central Bank Digital Currencies (CBDCs) by other major economies (which the US has been slow to pursue) could eventually offer an alternative for cross-border financial transactions.
• Growth differentials: Faster growth in Asia (China, India, ASEAN) increases trade and financial flows in non‑USD currencies over time.
• Rise of alternatives: Euro, Chinese renminbi, and basket/Special Drawing Rights (SDR) can grow share, especially regionally; but each has material constraints.
• BRICS challenge – As of 2025 , 10 BRICS countries( Led by Brazil , Russia, India , China , South Africa) & 13 partner nations are developing the BRICS Bridge payment network to settle transactions using Central bank digital currencies. This might become a big challenge to USD hegemony in future.

 

Sustaining Factors

• Trade Invoicing: A large majority of global trade, even between non-US countries, continues to be invoiced in US dollars, sustaining high global demand for the currency.
• SWIFT System: The USD remains the most dominant currency in the SWIFT global interbank payment system, indicating its ongoing role as the primary medium of exchange.

 

Key risks that could accelerate USD decline

• A sustained loss of confidence triggered by runaway inflation, US fiscal crisis, or inability of the US to roll/refinance debt at affordable rates.
• A concerted geopolitical/financial bloc formation like BRICS etc that shifts trade and reserves to another currency or basket.
• Rapid, large‑scale liberalization and internationalization of China’s financial system combined with confidence in Chinese institutions.

 

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Is this is the beginning of end of Dollar hegemony & consequently US hegemony & domination over global economy & capital markets” ? Lets not forget that we had such changes in Global Foreign reserve currency  & trading currency earlier too( from Portuguese Real in 1450s  to Spain Dollar  in 1530s  to Dutch in 1640s to British Pound in 1780s  historically). Last such change was in 1944 at Bretton Woods meeting with Global reserve & trading currency passing from British Pound to USD , after Britain almost bankrupted after the 2 world wars with Debt/ GDP > 250% . Is USD going the same route in 1-2 decades? Is this the beginning of the end?

 

what is current outlook for US Dollar as a global reserve currency & trading currency for long term(next 10-20 years)?

The long-term outlook (next 10-20 years) for the US Dollar (USD) as the world's primary global reserve currency and trading currency suggests a future of gradual decline in its market share but continued dominance due to structural advantages for probably 1-2 decades . A dramatic or sudden "de-dollarization" event is widely considered unlikely, but the system is evolving into a more multipolar financial system.

The most likely scenario over the next 10-20 years is a "rising tide" where other currencies gradually gain share due to global diversification and the strengthening of their own financial markets, rather than a rapid, shock-driven "unforced error" where the US abruptly loses confidence due to its own actions. The USD will likely remain primary, but with a diminishing share of the global pie.

 

 Some issue/concerns on recent US equity market trends.

·        Big risk is heavy concentration of market growth in a handful of large tech companies, often referred to as FAANG or the "Magnificent Seven". The top 10 stocks, primarily tech giants, represent over 37% of the S&P 500's total value. The "Magnificent Seven" (Google, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) have driven a majority of the S&P 500's gains in recent years. This creates a scenario where if these stocks perform well, the index looks healthy, even if the other 493 companies are struggling

 

·        Magnificent seven stocks are mainly going up , based on their AI related investments and earnings projections (contributing 45-50% of market cap gains of S&P 500 this year )and hence there could be a bubble/ over-hype  situation of they don’t deliver on AI projections.”

 

·        US market cap/GDP ratio(favourite Warren Buffet indicator measuring over-valuation at >100%) has touched a record 222%( 67 Trillion market cap to 30 Trill GDP). This is definitely in over-valuation zone(bubble zone for any other country)

 

·        Is Hyper expectations(hype) over AI leading to bubble in US markets?

 

Pl look at the table below from Economic Times( this week)

Just these Big tech club of 5 companies(Nvidia, Apple, Microsoft, Google/Alphabet & Amazon) , together command a market cap of 18 Trillion(about one third of S&P 500 index market cap) and gained 3.3 Tril (22% up) , representing 40% of market cap gains this year. And all these Big 5 companies are growing on AI related expectations/hype .  Leading US Tech companies have pledged more than 500 Bill $ on AI & data centre investments in 2025 , with projected AI revenues at 217 Bil in 2025 and >1300 Bil in 2032(6.5 times growth in 7 years) , which is > 30% CAGR on revenues in 7 years , which looks like a tall order . What if AI led growth turns out to be a over hyped and bubble ? How will it impact the markets , when market starts looking for projected revenue growth , profitability & cash flow versus real numbers , in few quarters? Would it lead to US market crash , which will have negative impact on other national markets too ??

 

Implications for investors and policymakers

• Investors including retail ones: Review USD assets as core safe‑haven exposures & consider FX diversification benefits — consider allocation to non‑USD assets, hard assets (gold), and regionally balanced portfolios. Hedge USD exposure where appropriate for specific liabilities. Retail investors , specifically ,should be mandatorily investing at least 10-20% of their portfolio on Gold ETF ( It has given better returns in last 5 to 10 years@ 15-18% than equities( Nifty @ 12% & NYSE at 11% CAGR in last 10 years)
• Corporates: Prepare for more multi‑currency invoicing and hedging, especially in Asia‑centric trade.
• Policymakers: US should address long‑run fiscal/debt sustainability, maintain deep markets, and manage geopolitical relationships to preserve dollar credibility. Other countries wanting greater currency internationalization must liberalize capital accounts, strengthen legal/financial institutions, and build market depth. RBI should be significantly increasing its Gold holdings to few more times than current 14% , like US & other big developed countries.

• Indian economy & equity markets are on the threshold of doing very well /outperforming in medium term (next 1-2 years) as well as long term , after consolidating in last 12 months.  I have given some relevant recommendations including some strong sectors and trends for India  in my last blog . Putting the link below

https://indiavalueinvesting.blogspot.com/2025/10/current-equity-market-outlook-abhi-to.html

 

Hope you found it interesting , productive & useful. Pl provide your feedback/inputs

Happy Investing.

Cheers

Amardeep