Written by: Zhou Ziheng

The Essence of Dollarization and the Source of Currency Value

Dollarization refers to the phenomenon where the US dollar dominates international trade, reserves, and financial transactions. This system is not based on the intrinsic value of the dollar itself, but arises from its mandatory demand as a major global reserve currency and medium of exchange. As a fiat currency, the dollar is essentially made from cotton and linen fibers, lacking gold or other physical backing, and its value primarily comes from external coercive forces and market demand.

To illustrate with a simple analogy: Suppose a daily necessity (like a pen) originally has a market value of 5 dollars. If the government mandates itself as the sole producer and supplier, requiring all citizens to hold this item, otherwise facing legal penalties, demand will surge dramatically, leading to skyrocketing prices. The dollar system is similar: The US government compels domestic entities to use dollars through taxes, debt repayments, and regulatory requirements. Meanwhile, on an international level, through oil trade (the petrodollar system) and reserve demand, a continuous absorption of dollars globally is created.

The petrodollar system began in the 1970s when the United States made agreements with oil-producing countries like Saudi Arabia to price and settle oil in dollars. In return, the US provided security assurances. This arrangement forced countries importing oil to hold dollars, creating a cycle: oil-exporting countries, after receiving dollars, would often invest in US Treasury bonds, further bolstering dollar demand. Central banks also maintain dollars as a major reserve asset to preserve their liquidity advantages.

However, this value is not eternal. Once demand weakens, the purchasing power of the dollar will decline, leading to increased import costs, greater inflationary pressure, rising interest rates, and real wage growth lagging behind living costs, ultimately eroding the living standards of ordinary people.

The De-Dollarization Process: Definition, Driving Factors, and Recent Developments

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

By early 2026, the value of global central bank gold reserves has exceeded that of US Treasury bonds, becoming the largest reserve asset. Central bank gold holdings are approximately 4 trillion dollars, slightly above the 3.9 trillion dollars in US Treasury bonds. This is the first occurrence of such a reversal since the mid-1990s. The share of gold in central bank reserves rose from around 5% in 2015 to about 24%, while the share of US Treasury bonds fell from 33% to about 21%. This shift reflects the transfer of demand from dollar assets to physical assets.

The driving factors primarily include three aspects:

The Weaponization of the Dollar: In 2022, the West imposed sanctions on Russia, freezing hundreds of billions of its foreign exchange reserves (largely in dollar assets). Although this action aimed to apply pressure, it sent a signal globally: holding dollar assets may face political risks and could be "frozen at the push of a button." Russia then turned to gold and other non-dollar assets, accelerating its diversification process. Similar sanction logic has reappeared in other geopolitical conflicts, further undermining trust.

The Irresponsibility of US Fiscal Policy: The US federal government's fiscal deficit continues to expand. The revenue for fiscal year 2025 is estimated at about 5.3 trillion dollars, expenditure at about 7.1 trillion dollars, resulting in a deficit of about 1.8 trillion dollars. The 2026 fiscal year deficit is expected to reach 1.9 trillion dollars and will gradually expand to 3.1 trillion dollars over the next decade. National debt has surpassed 39 trillion dollars, and interest payments have become one of the major burdens, with projected net interest costs exceeding 1 trillion dollars in 2026. Ongoing borrowing demands rely on foreign buyers, but weak demand forces the Federal Reserve to fill the gap through money creation, leading to a rising risk of dollar depreciation.

The Federal Reserve's Monetary Policy: Large-scale monetary injections dilute the value of the dollar. After foreign investors purchase US Treasury bonds, the principal and interest returned are reflected in the depreciated dollar, lowering actual returns. This prompts reserve managers to seek alternatives.

The combination of these factors has shifted de-dollarization from a defensive measure to an active strategy. Data from the International Monetary Fund (IMF) indicates that the dollar's share in global foreign exchange reserves has declined from about 71% in 1999 to below 58%, with gold absorbing part of the reallocation.

The Shift in Central Bank Reserve Structure: The Rise of Gold and the Relative Decline of Treasury Bonds

Central bank actions are the most direct indicators of de-dollarization. Since 2022, central bank gold purchases have consistently exceeded 1,000 tons annually, far surpassing the average of 473 tons from 2010 to 2021. Although purchases are expected to slightly drop to 863 tons in 2025, strong momentum is still maintained. In February 2026, a net increase of 19 tons shows resilient demand.

Countries like China, Russia, India, Brazil, and Turkey are major buyers. The People's Bank of China has increased its gold holdings for several consecutive months, with official reserves surpassing 2,300 tons. Brazil reduced its holdings of US Treasury bonds by 61 billion dollars in 2025 while doubling its gold holdings. Russia sold all its US Treasury bonds post-sanctions and increased its gold reserves by 915 tons.

This shift is attributed to gold's "no counterparty risk" property: it is not a liability of any government, is not subject to being frozen by a single jurisdiction, and cannot be printed indefinitely. In contrast, demand for US Treasury bonds faces structural pressures. Foreign official holders are shifting toward short-term treasury bills or diversifying assets, while gold prices have hit record highs multiple times in 2025-2026, partly benefitting from this demand support.

Analysts believe that this crossover marks the beginning of a multipolar reserve reality, rather than the complete collapse of the dollar. The dollar still dominates global trade settlements, but reserve diversification has become a trend. 43% of central banks plan to further increase gold holdings in 2026.

De-Dollarization in Global Trade: Bilateral Agreements and the Evolution of the Energy Market

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

In bilateral trade between China and Russia, over 95% has been settled in RMB and rubles, with some periods nearing 99%. Russia employs local currencies for 90% of trade with BRICS partners. The proportion of RMB settlements in Chinese cross-border trade has risen from a low level in 2010 to around 53%. Brazil has reached a RMB-real settlement agreement with China, covering part of their bilateral trade. India uses rupees or rubles for some energy trade with Russia, where Indian refiners will settle Russian crude oil in RMB and dirhams by 2026.

The energy sector is particularly critical. Historically, nearly 100% of oil trade was priced in dollars; currently, about 80% still is, but 20% of transactions are shifting to non-dollar currencies. China, as the largest crude oil importer, promotes the "petro RMB" initiative. Iran requires the use of RMB for transit fees when passing through the Strait of Hormuz, and some tanker transactions have bypassed the dollar. Oil-producing countries like Saudi Arabia are also exploring dollar contracts, although the scale remains limited.

These changes do not replace the dollar overnight but gradually erode its share. Alternative payment systems such as China’s CIPS, Russia’s SPFS, and the proposed BRICS payment mechanism are building parallel infrastructure. Cross-border projects like mBridge are testing local currency energy settlements. Although a unified BRICS currency has not formed, local settlements reduce transaction costs and exchange rate risks while decreasing reliance on SWIFT.

The US sanction policy sometimes backfires: the financial isolation of Russia has prompted it to adapt to new pathways, accelerating de-dollarization. Similar dynamics have been observed in places like Iran, where oil revenues no longer automatically flow back to US Treasury bonds but are used to purchase Chinese goods, forming a new cycle.

Analysis of the Impact of De-Dollarization on the US Economy and Globally

If de-dollarization continues, it will affect the US through multiple channels:

Reduced Demand and Dollar Depreciation: A decline in foreign demand for dollars and Treasury bonds will raise US borrowing costs. Rising Treasury yields will increase the government's interest burden and extend to mortgages, auto loans, and corporate financing. By 2026, with the scale of debt, interest payments become a heavy pressure.

Inflation and Living Costs: The weakening dollar makes imports (energy, consumer goods) more expensive. Wage growth often lags, leading to a decline in real purchasing power and relative living standards. While the US, as a net energy exporter, may have a buffer, global supply chains are still affected.

Investment and Financial Markets: The low-interest-rate environment may come to an end. Stock and bond markets face volatility, with pension funds and savings returns under pressure. Demand for hard assets like gold rises, potentially further diverting capital.

On a global level, de-dollarization promotes a multipolar financial system. Developing countries are reducing their exposure to risks associated with a single currency, aiding trade diversification. However, in the short term, this may increase exchange rate fluctuations and transaction frictions. Fragmentation in the energy market could lead to price instability, affecting global economic growth.

Not all analyses view this as a disaster. The advantages of the dollar still exist, including deep financial markets, a rule-of-law environment, and network effects. De-dollarization is more of a gradual adjustment rather than a collapse. IMF data indicates that the dollar's share decline is primarily due to valuation effects and diversification, rather than mass selling.

Implications for Individuals and Households: Risk Management Strategies

In the context of de-dollarization, the risks of currency depreciation and inflation are rising. Diversifying asset allocation becomes a rational choice. Gold, as a favored asset by central banks, provides a hedge: it is not controlled by a single government and retains value in uncertain times. Physical gold, gold-related ETFs, or mining stocks can all be considered, but liquidity, storage costs, and regulatory factors need to be assessed.

Furthermore, holding diverse currency assets, investing in productive physical assets, or using inflation-hedging tools (such as certain commodities) can help buffer the erosion of purchasing power. In the long run, enhancing skills and increasing income sources are more important than merely relying on currency. Policymakers need to focus on fiscal sustainability; otherwise, external pressures will amplify domestic challenges.

De-dollarization reflects a restructuring of global geopolitical economics. The fiscal discipline, diplomatic restraint, and innovative competitiveness of the United States will determine the evolution of the dollar's status. The process is slow but irreversible, and participants must adjust strategies based on factual data rather than panic. This transformation may eventually foster a more balanced international monetary system, but the uncertainty during the transition period will test the adaptability of various countries.

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