Imagine an importer in Thailand purchasing oil from an international supplier. A Brazilian company borrowing money to expand its operations. An Australian mining business selling iron ore overseas. A central bank in Indonesia building its foreign currency reserves.
These activities appear unrelated, but they share an important connection: the US dollar.
The dollar occupies a unique position in the global economy. It is used extensively in international trade, serves as the principal currency for many commodity markets, underpins a substantial share of cross-border borrowing and remains the world’s leading official reserve currency.
This gives the United States an extraordinary influence over international financial conditions. Decisions made by the Federal Reserve, changes in American economic expectations and movements in the dollar can affect borrowing costs, import prices, investment flows and government finances across the world.
When the dollar strengthens, some American consumers and businesses benefit from greater purchasing power abroad. However, companies in emerging markets may find imported fuel more expensive, governments may face heavier debt repayments, and international investors may withdraw capital from riskier markets.
When the dollar weakens, the opposite effects can emerge. Importers may receive some relief, emerging-market borrowers may find their dollar debts easier to manage in local-currency terms, and international capital may flow towards other markets. Yet American consumers can face higher import prices, and foreign companies earning substantial dollar revenues may see those earnings translate into less money at home.
The consequences are rarely straightforward. A stronger dollar can reflect confidence in the US economy, rising American interest rates or a global flight towards perceived safety. A weaker dollar can reflect changing monetary policy, concerns about American economic prospects or improving opportunities elsewhere.
Understanding the dollar therefore means understanding more than currency exchange rates. It means examining the financial connections linking countries, companies and investors.
Why the Dollar Became the World’s Dominant Currency
The dollar’s international position developed over many decades, particularly during and after the Second World War. The United States emerged from the conflict with enormous industrial capacity and a central role in the reconstruction of the global economy. The Bretton Woods monetary system established the dollar at the centre of the postwar international monetary order, although that system’s fixed exchange-rate arrangements eventually ended in the early 1970s.
The dollar’s importance persisted because the foundations supporting it extended beyond the original monetary system.
The United States has a large economy, extensive financial markets and a deep market for government debt. US Treasury securities are widely held by domestic and international investors because they offer a highly liquid way to hold dollar-denominated assets. The dollar is also supported by established payment networks, financial institutions and decades of commercial practice.
These advantages reinforce one another.
A company may choose to invoice an international transaction in dollars because its suppliers already use the currency. Banks may provide dollar financing because their customers need it. Investors may purchase dollar assets because those assets are easy to trade and useful for managing liquidity.
As more participants use the same currency, it becomes more convenient for others to use it too.
This network effect is one reason the dollar’s position is difficult to replace, even as other economies become more influential.
According to the Federal Reserve’s The International Role of the U.S. Dollar — 2025 Edition, the dollar accounted for approximately 58% of disclosed global official foreign exchange reserves in 2024, compared with about 20% for the euro and 2% for the Chinese renminbi. The report also found that the dollar’s overall international role remained substantially greater than the United States’ share of global GDP or trade. Federal Reserve, 2025.
These figures help explain why developments in the American economy can influence countries that trade relatively little with the United States itself.
The dollar is not simply America’s currency. It is also a central piece of the infrastructure through which much of the world conducts business.
The Dollar and Global Trade
International trade involves a basic problem: buyers and sellers often operate in different currencies.
An Indonesian manufacturer might sell products to a European customer, purchase machinery from Japan and import components from China. Each transaction could involve different exchange rates, payment systems and financial risks.
Using a widely accepted intermediary currency simplifies many of these arrangements.
The dollar performs this role extensively. Exporters may quote prices in dollars even when neither the buyer nor the seller is American. Banks provide dollar-denominated trade finance, while companies use currency markets to convert their earnings and pay suppliers.
The Federal Reserve’s research found that, across the regions it examined, the dollar accounted for the overwhelming majority of export invoicing in the Americas and a large majority in the Asia-Pacific region and other regions outside Europe, using data from 1999–2019. The euro is particularly important in European trade. Although these invoicing figures are historical rather than a current-year measurement, they demonstrate the depth of the dollar’s established role. Federal Reserve research.
This widespread use creates both convenience and exposure.
Consider an importer in Thailand buying $1 million of machinery. If the exchange rate is 35 baht per dollar, the machinery costs 35 million baht before shipping, taxes and other expenses.
If the baht weakens to 38 per dollar, the same machinery costs 38 million baht.
Nothing about the machinery has changed. The supplier has not raised its price. Yet the importer must find an additional 3 million baht to complete the purchase.
For businesses operating on narrow profit margins, such movements can be significant.
Companies may respond by raising prices, negotiating with suppliers, reducing other costs or hedging their currency exposure through financial contracts. Some will have sufficient pricing power to pass on the increase. Others will have to absorb it.
This is why exchange rates matter even to companies that have no direct operations in the United States.
Commodities: Why the Dollar Matters to Oil, Metals and Agriculture
Many internationally traded commodities, including oil and numerous industrial metals, are commonly priced in dollars.
This convention links the dollar to the cost of energy, raw materials and food across the global economy.
Imagine that the international price of oil remains unchanged at $80 per barrel. If the dollar strengthens against an importing country’s currency, that country must spend more of its local currency to purchase the same barrel of oil, all else being equal.
The effects can spread through an economy.
Higher fuel costs increase transport expenses. Businesses may pay more to operate machinery, manufacture goods and distribute products. Airlines face higher costs for aviation fuel, while governments may encounter additional pressure to subsidise energy or support households.
If businesses pass these costs on to customers, currency depreciation can contribute to domestic inflation.
However, the relationship between the dollar and commodity prices is not mechanical.
Commodity prices respond to supply disruptions, inventories, industrial demand, weather, production decisions and geopolitical events. A strong dollar can coincide with rising commodity prices if a major supply shock pushes prices higher by more than currency movements offset them.
A weaker dollar can also coincide with falling commodity prices during a global recession if demand deteriorates sharply.
For investors, the important distinction is between the dollar price of a commodity and the price paid by a buyer using another currency.
A copper producer selling its output in dollars may receive the same dollar revenue while its local-currency revenue increases if its domestic currency weakens. But its profitability also depends on wages, energy, equipment, royalties and other expenses, some of which may rise alongside the exchange rate.
Commodity producers and consumers therefore face different currency exposures. A weaker local currency can benefit an exporter with predominantly local costs and dollar revenues, while hurting an importer that must pay for essential materials in dollars.
The Dollar and the Global Debt Market
One of the dollar’s most consequential roles is its position in international borrowing.
Governments, banks and companies outside the United States frequently borrow in dollars because international lenders and investors are accustomed to financing assets in that currency.
This can be commercially useful. A company that earns dollar revenues may prefer to borrow in dollars because its income and debt payments are naturally matched.
Problems arise when a borrower earns money in a different currency but must repay a dollar-denominated loan.
Suppose a company in an emerging market owes $100 million to international creditors. At an exchange rate of 10 units of local currency per dollar, its principal represents 1 billion local-currency units.
If the local currency weakens to 12 per dollar, the same dollar debt represents 1.2 billion local-currency units.
The debt has not increased in dollar terms, but the domestic cost of repaying it has risen by 20%.
The company may now need to devote more revenue to servicing its debt, reduce investment or seek additional financing. If it cannot generate enough cash, its creditworthiness may deteriorate.
The International Monetary Fund has highlighted this problem in its research on the strong dollar. Approximately half of cross-border loans and international debt securities have been denominated in dollars in the data discussed in its analysis, leaving many borrowers exposed to exchange-rate movements. The precise exposure varies by country, sector and period. IMF, How Countries Should Respond to the Strong Dollar.
Why American interest rates matter too
Currency movements do not occur in isolation.
When the Federal Reserve raises interest rates, dollar-denominated investments may become more attractive relative to comparable assets elsewhere, depending on expected returns, exchange-rate risks and market conditions.
Higher US interest rates can also increase global borrowing costs, especially for borrowers who need to refinance dollar debt.
If the dollar strengthens at the same time, emerging-market borrowers may face a double challenge: financing becomes more expensive, and the local-currency cost of existing dollar obligations rises.
This combination can reduce corporate investment, strain government budgets and increase the risk of financial distress.
However, higher US interest rates do not automatically strengthen the dollar. Markets respond to expectations as well as actual decisions, and other countries’ interest rates, risk perceptions and economic prospects also influence exchange rates.
For investors, the key is to examine the relationship between interest rates, the dollar and a borrower’s ability to service its debt.
Emerging Markets: The Dollar’s Most Vulnerable Audience
Emerging markets can experience particularly strong effects from dollar movements because many rely on imported energy, industrial equipment and other essential goods while also depending on international financing.
A strong dollar can affect these economies through several channels at once.
Import costs rise. If a country’s currency weakens against the dollar, imported fuel, machinery, fertiliser and other dollar-priced goods become more expensive in local-currency terms.
Inflation can increase. Higher import costs can feed into consumer prices, depending on how much businesses pass on and how domestic demand responds.
Foreign borrowing becomes harder to manage. Governments and companies with dollar-denominated debt face higher local-currency repayment costs when their currencies depreciate.
Capital flows can change. If investors find dollar assets more attractive or become more cautious about emerging markets, capital may move away from local bonds, equities and currencies.
Central banks face difficult decisions. Authorities may consider higher interest rates to support their currencies or limit inflation, but tighter monetary policy can also weaken domestic demand and increase borrowing costs.
These effects are not identical across all emerging economies. Countries with strong foreign exchange reserves, credible monetary policy, flexible exchange rates and limited foreign-currency debt may be better placed to absorb shocks.
Exporters earning substantial dollar revenues may also benefit from a weaker domestic currency, partly offsetting higher import costs.
The IMF’s 2023 analysis of the previous major dollar appreciation estimated that a 10% strengthening associated with global financial market forces was followed by a 1.9% decline in emerging-market economic output after one year in the study’s model, with effects persisting for around two and a half years. The corresponding peak effect for smaller advanced economies was estimated at 0.6%. These are research estimates for a particular set of conditions, not a universal rule for every country or every dollar movement. IMF, Emerging Market Economies Bear the Brunt of a Stronger Dollar.
The broader lesson is that the dollar can transmit financial conditions from the United States into economies with very different domestic circumstances.
Foreign Exchange Reserves: Why Central Banks Hold Dollars
Central banks maintain foreign exchange reserves to help manage external financial pressures and support confidence in their economies.
These reserves can be used to meet international payment needs, provide foreign currency during periods of market stress and, where appropriate, help smooth disorderly exchange-rate movements.
The dollar is central to this system because it is widely accepted, extensively traded and supported by a large market for dollar-denominated assets.
Central banks commonly hold reserves in highly liquid assets, including US Treasury securities, rather than keeping all their reserves as banknotes or idle cash.
This creates an important connection between the dollar and the US government bond market. Foreign demand for dollar assets helps provide a pool of buyers for American government debt, while Treasury securities provide reserve managers with assets they can generally trade in large quantities.
The arrangement benefits both sides, although the scale and effects of foreign demand vary over time.
For the United States, international demand for dollar assets can support financial-market liquidity and help the government borrow from a broad investor base. The dollar’s international role can also give American institutions and companies convenient access to global financing and payments.
For other countries, dollar reserves provide a buffer against external shocks. But they also expose reserve portfolios to changes in US interest rates, bond prices and the dollar’s value against other currencies.
If a central bank holds US Treasury securities and American interest rates rise, existing bond prices can fall. If the dollar subsequently weakens against the central bank’s domestic currency, the local-currency value of its dollar assets can also decline.
Reserve management therefore involves balancing liquidity, safety, accessibility and investment returns.
Could another currency replace the dollar?
The dollar’s dominance is not guaranteed to remain unchanged forever.
The euro has an important international role.
