Dollar dominance: The impacts

As Trump’s tariffs continue to dominate global headlines, we’re taking a step back with our explainer series to look at the role of the US dollar in the world economy. Because of ‘dollar dominance’, countries across the world are forced to acquire dollars: for international transactions, their foreign exchange reserves and for debt repayments. It’s this imperative that makes US trade and monetary policy decisions all the more impactful, but, what exactly are these impacts, and how does dollar dominance affect the Global South in other ways? This blog explores.

How does dollar dominance contribute to Global South debt?

At its core, dollar dominance makes accumulating dollars a necessity for countries in the Global South, and one of the most clear ways the negative impacts of this can be seen is when it comes to debt.

As explained in our previous blog, 64% of world debt is dollar-denominated, meaning that it has to be paid back in dollars. Therefore, countries need dollars, both to service their debt, and for other reasons, like to pay for essential imports. They could export to gain dollars, as will be discussed below, but many countries end up also having to borrow dollars from foreign creditors. However, Global South countries have to borrow at much higher rates than the US or other Global North countries due to such loans being (often unfairly) perceived as more risky. This makes the debt even more expensive, and so even more difficult to pay back.

As a result, the servicing of dollar-denominated debts often becomes a massive burden for Global South economies, diverting resources away from domestic developmental priorities in order to repay these debts. Many Global South countries spend more on debt servicing than on education or healthcare, with 54 countries forced to divert 10% or more of government revenue towards debt servicing across Africa, Asia and Latin America.

Even when countries gear their economy towards the accumulation of foreign currency by focusing on exporting above all else, debt obligations can still lead to a debt spiral, where countries are forced to take on even more foreign loans to avoid defaulting on their debt. Defaulting can have significant negative consequences by further increasing the cost of borrowing, or leading to harsh impositions of austerity or privatisation measures as part of debt restructuring programs, or even legal action by creditors.

Not only this, but dollar dominance means Global South countries also suffer from currency mismatch risks due to their debts, since the revenues of their governments are in local currency but their debts are denominated in dollars. If their local currencies weaken against the dollar, that means that it becomes more expensive for them to service their debt.

These factors, all leading to an even more extreme burden of debt, can mean that Global South countries are stuck in a cycle of having to impose austerity measures. This happens because implementing austerity is often a condition of loans from last-resort lenders like the International Monetary Fund, or is viewed as the only option to be able to service debt (despite economic research saying otherwise). This leaves little room for domestic developmental priorities or policies for anything else, such as investment that would improve economic development and productivity, as policies have to focus on dollar accumulation and servicing foreign debt.

How does dollar dominance make the Global South more vulnerable to US actions?

As a result of having the majority of their sovereign debt denominated in dollars rather than in the local currency, countries in the Global South are highly vulnerable to changes in US monetary policy. This is because the cost of repaying that debt rises whenever the US Federal Reserve raises interest rates, and high US interest rates have been a recent contributor to worsening debt crises across the Global South. Changes like this, or increases in the value of the dollar, can have an outsized impact on Global South economies since such a high proportion of debts are denominated in dollars.

The need to meet debt obligations and accumulate dollars also leads to a vulnerability to the US weaponising the dollar as a foreign policy tool. There are many ways this can happen, which you can read more about in our blog, but the most discussed example right now is US-imposed tariffs. Tariffs are making goods from the Global South less price-competitive for American consumers, meaning exporting countries are losing out on vital dollar income. The US tariffs have even higher stakes for these countries than losing out on money from elsewhere, because of dollar dominance making dollars so essential to accumulate. The result of this can be seen in the current context of Trump’s tariffs, as countries across the Global South that are heavily reliant on the US as an export market may feel forced to offer various concessions in exchange for reduced tariffs. Although this callous tactic of intimidation is unlikely to be effective on countries with more diversified trade partners, any such concessions will only further the already unjust appropriation of wealth from the Global South by the Global North.

What are the other impacts of dollar dominance for countries in the Global South?

Dollar dominance also results in many other negative impacts for Global South countries.

Firstly, as mentioned, as well as turning to loans, many Global South countries are forced to gear their economies towards exporting to acquire the dollars they need through global trade. Trying to export as much as possible, at the most competitive price, often leads to a ‘race to the bottom’, where countries lessen workers’ rights or environmental regulations to maximise the exploitation of natural resources to acquire dollars. The reliance on resource extraction leads to ecological harm, including deforestation, pollution, and resource depletion.

The cycle of environmental harm facilitated by dollar dominance goes further, as having to gear their economies towards dollar accumulation strategies and debt repayments means Global South countries are forced to deprioritise investment in both climate change mitigation and adaptation. The dynamic is even more unfair when considering how many Global North countries rely on natural resources from the Global South, such as lithium for batteries. These materials are regularly appropriated by the Global North to support their transition to green technologies and clean energy, often considered an act of ‘green colonialism’, as most countries in the Global South are unable to undertake similar public investment programs but suffer ecological degradation and resource depletion as a result of the North’s green strategies. 

Because of dollar dominance, Global South countries are also heavily reliant on Global North-based banks and financial intermediaries for global payments. As international trade is largely conducted in dollars, it means that Global South countries rely on payment systems like SWIFT for a large part of their international transactions, even for much of South-South trade. Since SWIFT is dollar-based, this means that local currencies first have to be converted into dollars, a process which can be costly and include hidden fees and markup rates imposed by the intermediaries. This is yet another instance of Global South countries losing out.

A final knock-on effect from dollar dominance worth mentioning is how it can lead to political and social instability. An example of this is Sri Lanka, where in 2022 its debt default led to shortages of essential goods and soaring inflation. The IMF intervened with a $2.9 billion bailout package, but it came with austerity conditions like raising taxes and cutting public services which further fueled public unrest and political instability. The debt crisis led to political unrest, widespread protests on the streets and the removal of the then President. Dollar dominance was a key destabilising factor in this.

Overall, dollar dominance places Global South countries into a subordinate position within the IMFS, exposing them to various vulnerabilities and forcing their economies to be geared towards dollar accumulation and foreign debt-servicing. It creates an international financial system that reinforces neo-colonial relations, in which Global South countries are left extremely vulnerable to US monetary policy or coercive measures. 

In this context, it’s easy to see why countries are looking for ways out of the trap of dollar dominance, and the movement against the dollar, or for ‘de-dollarisation’, is growing. To find out more about what de-dollarisation could look like, including the barriers and opportunities to challenge this status quo, take a look at our next blog in the series Dollar dominance: The future?

Want to learn more? Take a look at our ‘Beyond Dollar Dominance’ report, explainer videos, and check out the first blog in this series Dollar Dominance: Explained!