After the end of World War II, the U.S. dollar has been the world’s most important currency as it is the most widely used currency in global trade, covering around 88 percent of businesses last year.

According to IMF reports, the U.S. dollar has served as the leading international currency. As of the second quarter of 2024, central banks of the countries held around 58 percent of their allocated reserves in U.S. dollar, with many of these reserves in cash in U.S. bonds.

By nearing the end of World War II, 44 allied nations met in Bretton Woods, U.S. in July 1944. Delegates met with a purpose to discuss a new international currency that would help to recover the losses caused by war, lessons to deal with future challenges, and a stable financial system for global trade.

Countries agreed to convert international balances into dollars, with the dollar pegged to gold at USD 35 per ounce. Why the U.S. dollar? Because the U.S. was the only country largely intact after World War II, while the European economies were severely damaged and suffered heavily from the war. Besides, the U.S. held most of the world’s gold supply, and the gold-backed dollar was the most stable option back then. As a result, countries agreed to support the U.S. dollar and declared it the official global reserve currency.

Though the Bretton Woods system lasted until August 1971, when President Richard Nixon decided to suspend the dollar’s convertibility to gold. The decision was made due to two major reasons: the overspending of U.S. dollars to finance the Vietnam War, which raised concerns over the stability of the dollar, and, second, the lack of sufficient gold reserves to support the dollar’s value.

Despite various global challenges, the U.S. dollar has been dominating international trade for many decades, and the United States itself has benefited more than any country. The world’s major commodities, such as oil, gas, and steel, are being traded in U.S. dollars. There are also domestic factors that contribute to the dollar’s dominance, including its stable value, the size of the U.S. giant economy with a volume of over USD 27 trillion, mighty military strength, and the United States’ geopolitical influence.

Since the Cold War era, the United States has been using the dollar and the dollar payments system as a weapon to impose economic sanctions on unfriendly countries or on those countries whose actions do not align with US interests, aiming to control their behavior and actions. The US has been employing sanctions since the 1950s, initially imposing them on the Soviet Union and North Korea.

The strategy of sanctions has continued and extended to Iran, Cuba, Venezuela, Afghanistan, and Pakistan. Although the sanctions had been partially effective in the case of Cuba and North Korea, in most cases, such as Iran and Russia, they remain largely ineffective. The US even imposed sanctions on the members of the International Criminal Court (I.C.C.) for investigating the possible war crimes committed by the US in Afghanistan.

The excessive use of sanctions by the US has reduced their effectiveness over time.

Following the Ukraine conflict in February 2022, the U.S. blocked Russia’s access to USD 300 billion in liquid foreign exchange reserves in the US and in NATO countries. Although some allies of the United States supported this move, it raised concerns among other states. It was realized that the U.S. might weaponize the dollar even against its allies if it finds that a country’s policies are not in the U.S.’s favor.

After observing such unilateral decisions of United States, the European countries realized the importance to create an EU-based system which should be an independent of SWIFT and US payment system, and that would not involve dollar payment. In 2023, French President Emmanuel Macron tried to draw attention to the fact that Europe needs to reduce its dependence on the dollar to protect itself from “American Vassals.”.

The wide use of the U.S. dollar in imposing sanctions has triggered other nations to look for alternative currencies for bilateral trade.

For example, according to a Global Times report, China and Russia conducted bilateral trade of over USD 240 billion, with 90 percent of that trade in Chinese Yuan. Despite the severe sanctions imposed on Russia, countries like India, Saudi Arabia, the UAE, and Turkey continue to trade with Russia using currencies other than the dollar.

BRICS, a rapidly growing economic bloc led by China and Russia, was established in 2009 with the aim of countering the West’s dominance over international institutions and has failed to serve developing nations sincerely.

Since 2022, Russia has taken the lead in promoting and supporting the idea of a BRICS international currency. The plan for a BRICS currency was also discussed at the BRICS summit in August 2023 under the suggested name “R5.”.

As of now, the BRICS has fourteen members representing a quarter of the global economy and almost half of the world’s population.

According to J.P. Morgan’s views on de-dollarization, “Diversification away from the dollar is a growing trend. However, they emphasize that the factors supporting the dollar’s dominance remain deeply entrenched and structural in nature. The dollar’s role in global finance, its economic and financial system for USD liquidity, and institutional transparency all indicate that any meaningful erosion of dollar dominance is likely to take decades.”

In this context, Pakistan is also faced with challenges and opportunities for de-dollarization. Here, a basic question arises: Is de-dollarization a viable strategy for Pakistan?

A large portion of Pakistan’s foreign exchange reserves are in USD, which is used to manage the balance of payments. In addition, 86% of Pakistan’s trade is denominated in USD, and euro-denominated trade accounts for less than 10%.

Pakistan’s heavy reliance on USD has caused the serious economic challenges as the country has lost almost 150% of its currency value since 2018, taking country to near hyperinflation and had diminished import capacity back into 2022-23 crises.

For Pakistan, a possible strategy can be reducing an overreliance on the U.S. dollar and diversifying its currency options into trade mechanisms. For example, using Chinese Yuan and Russian Ruble can decrease Pakistan’s overreliance on the US dollar.

In June 2023, Pakistan purchased the Russian oil in yuan, marking a major shift from its traditional practice of buying oil in US dollars.

Although, Pakistan has the potential and capability to gain benefits from evolving global dynamics, due to its strategic alignment with China, but it should not upset its major economically, United States.