Introduction to the US Dollar’s Dominance
The US dollar has long been the dominant currency in foreign exchange transactions. In 1989, it was involved in 90% of these transactions, and in 2025, this number has only slightly decreased to 89%. However, the holdings of currency reserves by central banks tell a different story. US dollar assets now make up 58% of reserves, according to the International Monetary Fund, which is a drop from 65% in 2016.
The Foreign Exchange Market
The foreign exchange market has grown significantly, with global trading reaching almost $10 trillion per day. This is a staggering figure, especially when compared to global trade in goods and services, which was around $33 trillion in 2024. This amounts to approximately $0.1 trillion per day, meaning that only about 1% of foreign exchange trading is related to international trade. The majority of foreign exchange trading is purely financial transactions, such as insuring against adverse currency movements or speculating.
A Crazy Month for Exchange Rates
April was a volatile month for exchange rates, with the average daily foreign exchange turnover reaching $9.6 trillion. This was fueled by the fallout from President Donald Trump’s ‘Liberation Day’ tariffs. The survey showed that the US dollar remains the dominant currency, involved in 89% of currency transactions. The euro, yen, and British pound follow, but the Chinese renminbi is growing fast and now accounts for 8.5% of transactions.
The Most Traded Currencies
The US dollar is the most traded currency, involved in 89% of transactions. The euro, yen, and British pound are also heavily traded, but the Chinese renminbi is gaining ground. Surprisingly, the Australian dollar is the seventh most traded currency in the world, just behind the Swiss franc. This may be due to speculators viewing it as a "commodity currency" or a proxy for less accessible Asian currencies.
Where Transactions Occur
The Bank for International Settlements also compiles information about where transactions occur. This shows that three-quarters of currency trading is concentrated in just four places: London, New York, Singapore, and Hong Kong. This concentration of trading activity has significant implications for the global economy.
Challenges to the US Dollar’s Dominance
Despite much discussion about challenges to the US dollar’s position, the trading data show little change. The US dollar was involved in 90% of foreign exchange transactions in 1989 and 89% in 2025. However, the decline in the holdings of currency reserves by central banks is evident. The US dollar and euro are each used for invoicing about 40% of global trade, while the renminbi is used for around 2%.
The BRICS Nations and the US Dollar
The BRICS nations, which include Brazil, Russia, India, China, and South Africa, have expressed a desire to trade more using their own currencies. They have increasingly resented the special status of the US dollar, which has been termed an "exorbitant privilege." This privilege allows the US to borrow at lower interest rates, but it also creates instability in the global economy.
Is Currency Trading a Good or Bad Thing?
Views differ about whether all this trading is a stabilizing or destabilizing force. If speculators succeed by buying low and selling high, this trading should be a stabilizing force. However, at times, ‘momentum trading’ may amplify fluctuations. Some have suggested throwing some "sand in the wheels" of global trading with a so-called "Tobin tax." This idea of a small tax on foreign exchange transactions was first suggested by Nobel Prize-winning Keynesian economist James Tobin.
Conclusion
In conclusion, the US dollar remains the dominant currency in foreign exchange transactions, despite some decline in its use as a reserve currency. The foreign exchange market is a complex and volatile system, with trading concentrated in a few major financial centers. While some argue that currency trading is a stabilizing force, others see it as a destabilizing influence. As the global economy continues to evolve, it is likely that the role of the US dollar and other currencies will continue to change. Understanding the complexities of the foreign exchange market is crucial for navigating the global economy and making informed decisions about trade and investment.
