Four-stage evolution of the US dollar anchor: the power code of the global financial landscape

Text: Li Jiange, Tianyuan, FT Chinese

In the grand structure of the global financial system, the US dollar has long occupied a core position, and the setting and changes of the "dollar anchor" behind it have profoundly influenced the direction of the world economy. The US dollar anchor is essentially the support foundation and source of credit for the US dollar's value. It is like the cornerstone of the financial building, laying the position of the US dollar in the international monetary system.

Since the 20th century, the US dollar anchor has gone through four important stages of development, from the early gold dollar, to the oil dollar, and then to the US dollar bond dollar, and now it is moving towards the exploration of digital dollar. Each change is accompanied by major adjustments to the international political and economic structure, reflecting the United States' strategic intention to safeguard financial hegemony and control the global economic discourse power in different periods. An in-depth analysis of these four stages will not only help to understand the formation and maintenance mechanism of the dominance of the US dollar, but also provide insight into the future changes of the global financial system, and provide key reference for countries to formulate financial strategies and respond to external financial shocks.

1. Golden Dollar: The Short-term Glory Under the Bretton Woods System

The two world wars reshaped the global political and economic map. With the advantage of being directly attacked by the war, the United States has developed rapidly in industrial production capacity and its economic strength has expanded rapidly. On the eve of the end of World War II, the global economic order needs to be rebuilt. In July 1944, representatives from 44 countries gathered in Bretton Woods, New Hampshire, USA to hold the United Nations International Monetary and Financial Conference. The meeting built an international monetary system centered on the US dollar - the Bretton Woods System. The core of this system is the "double-linked" principle: the US dollar is pegged to gold, and it stipulates that 1 ounce of gold is fixed for exchange of 35 US dollars, and the US government shall bear the obligation to exchange gold at the official price; the currencies of other countries are pegged to the US dollar, and the currencies of various countries are maintained at a fixed exchange rate with the US dollar.

The establishment of this system actually pushed the US dollar to the status of an international reserve currency equivalent to gold. At that time, the United States had about 75% of the world's gold reserves, and its strong gold base provided a solid credit endorsement for the US dollar, making the US dollar widely accepted in international trade and financial transactions. In essence, the Bretton Woods system is an international gold exchange standard system . The US dollar has become a bridge connecting the currencies and gold of various countries. The global monetary system revolves around the US dollar as the core, opening up an era where the US dollar dominates the international financial order.

Under the Bretton Woods system, trade settlements between countries are mostly carried out in US dollars. After the exporting country earns US dollars, if there is no demand for US goods, it can choose to convert the US dollar into gold to increase its own gold reserves; the importing country needs to exchange its own currency for US dollars to pay for the import payment. In this process, the US dollar, as an international payment means and reserve currency, promoted the expansion of international trade and the recovery of the global economy. The United States enjoys "excessive privilege" by exporting US dollars to purchase global goods and resources.

However, the system has been hidden from its birth, namely the " Triffen Problem ". American economist Robert Trifin pointed out that as an issuer of international reserve currencies, the United States faces two conflicting goals. On the one hand, in order to meet the demand for the US dollar by countries around the world, the United States needs to export the US dollar through the balance of payments deficit; on the other hand, in order to maintain the exchange relationship between the US dollar and gold, the United States must maintain the balance of payments surplus to accumulate gold reserves. With the development of the global economy, demand for the US dollar continues to increase, the US balance of payments deficit continues to expand, and the pressure on the exchange of US dollar and gold is increasing. By the end of the 1960s, the US gold reserves were constantly outflowing, and it was no longer possible to support the huge US dollar exchange demand, and the gold-dollar system was shaky.

In the 1960s, the United States was deeply trapped in the Vietnam War quagmire, fiscal expenditure increased significantly, and domestic inflation was high, and the balance of payments deteriorated sharply. Other countries' confidence in the US dollar has been frustrated, and they have exchanged US dollars for gold, and the US gold reserves have accelerated their loss. On August 15, 1971, the Nixon administration announced the implementation of the "New Economic Policy" and stopped fulfilling the obligation of foreign governments or central banks to exchange gold for US dollars to the United States. This landmark event announced the end of the fixed exchange rate system between the US dollar and gold, and the Bretton Woods system collapsed. Since then, the US dollar exchange rate has begun to float freely, and the gold dollar system has become history. Although the gold dollar system has only been maintained for more than 20 years, it has laid the basic position of the US dollar in the international monetary system. The subsequent evolution of the dollar anchor has been carried out under its influence, laying the groundwork for the United States to build financial hegemony.

2. Petro Dollar: The Deep Bundle between Geopolitics and Finance

After the US dollar decoupled from gold, the international monetary system fell into temporary chaos, and the US dollar urgently needed to find new value anchors to maintain its dominance in international currency. At this time, as the world's most important strategic energy, oil's key role in the modern industrial system is becoming increasingly prominent. In the early 1970s, the international political situation was changing, and the Middle East, as the world's largest oil-producing region, had constant geopolitical conflicts. In October 1973, the Fourth Middle East War broke out. In order to combat Israel and its supporters, the Organization of the Arab Petroleum Exporting Countries adopted measures such as oil production cuts, embargoes, and price increases, which triggered the first oil crisis. International oil prices soared from US$3.01 per barrel to around US$12 in 1974, and the balance of payments of oil exporting Countries showed a huge surplus.

The United States has keenly seized this opportunity and actively engaged in secret negotiations with major oil-producing countries in the Middle East such as Saudi Arabia. As the world's largest oil exporter, Saudi Arabia has a significant influence in the Organization of Petroleum Exporting Countries (OPEC). In 1974, the United States reached an agreement with Saudi Arabia, where Saudi Arabia agreed to use the US dollar as the sole denomination and settlement currency for oil exports. The United States provided military protection and economic assistance to Saudi Arabia, and promised to purchase Saudi government bonds to help it build infrastructure. Subsequently, other OPEC member states followed suit and the petrodollar system was initially formed.

After the establishment of the petrodollar system, a unique closed-loop operation mechanism was formed. In order to obtain oil, countries around the world must first hold US dollars. This has greatly increased the demand for the US dollar in international trade settlement, consolidating the US dollar's international currency status. Oil exporting countries earn a large amount of US dollar revenues through exporting oil, which are called "petroleum dollar." Due to the single domestic economic structure of oil exporting countries and cannot absorb such a huge amount of funds, most of the oil dollar flows back to the US financial market to purchase various assets such as US Treasury bonds, stocks, real estate, etc. The United States uses the repatriated petrodollars to continue importing global goods and services, maintaining its consumption-driven economic model, and redistributes petrodollars to the global economic system through monetary policy and financial market operations.

For example, oil exporting countries deposit petrodollars into banks of the United States, and banks lend these funds to other countries for importing oil or investing, and funds flow around the world. In this process, the United States not only controlled the pricing and settlement rights of global oil trade, but also absorbed global funds through the financial market, further strengthening its position as a financial center. At the same time, the United States maintains stability in the Middle East through military forces to ensure the normal operation of the petrodollar system. The United States deploys a large number of military forces in the Middle East to exert political influence on oil-producing countries in the Middle East. Once unstable factors threaten the petrodollar system appear in the region, the United States will quickly intervene, such as launching the Gulf War, to safeguard the core interests of the petrodollar system.

The petrodollar system has had a profound impact on the global economy. On the positive side, it provides stable energy supply and financial support for global economic growth. Stable oil trade is settled in US dollars, which has promoted the development of international trade. The US dollar's status as an international payment and reserve currency has been consolidated, promoting the integration of global financial markets. The large amount of petroleum dollar accumulated by oil exporting countries provides cheap funds to the United States by investing in financial assets such as U.S. Treasury bonds, supporting the U.S. fiscal deficit and economic development, and also providing some external financing sources for other countries.

However, the petrodollar system also brought many negative effects. Oil prices are closely linked to the US dollar exchange rate. The depreciation or appreciation of the US dollar will directly affect oil price fluctuations, increasing uncertainty in the global economy. When the US dollar depreciates, the oil price denominated in US dollars rises, triggering imported inflation and bringing an impact on the economies of other countries; on the contrary, the appreciation of the US dollar may lead to a decrease in income from oil exporting countries and affecting their economic stability. In addition, the petrodollar system has exacerbated global economic imbalances . The United States has been in a state of trade deficit for a long time and relies on the return of the petrodollar dollar to maintain its economic operation. Other countries have to export large quantities of goods to obtain the US dollar, resulting in an increasingly serious global trade imbalance. At the same time, the large inflow of petrodollars has made some oil-exporting countries over-rely dependent on oil exports, with a single economic structure and weak risk resistance.

3. US dollar bonds: credit support driven by debt

Since the 21st century, the international political and economic structure has undergone profound changes. On the one hand, emerging economies are rising rapidly, their contribution to global economic growth is constantly increasing, the international trade pattern is gradually diversifying, and the petrodollar system is facing an impact. On the other hand, the United States' own economic structure has changed, the proportion of financial services in the economy is increasing, and the virtual economy is over-inflated. In 2008, the US subprime mortgage crisis broke out, rapidly evolving into a global financial crisis, hitting the global economy hard. During the crisis, the US government adopted large-scale quantitative easing policies to save the market, the fiscal deficit rose sharply, and the scale of government bonds expanded rapidly. The total U.S. Treasury bonds exceeded $34 trillion for the first time on December 29, 2023. If the debt is distributed to the American people, the per capita debt will exceed $100,000.

Against this background, US debt has gradually become an important new support for the US dollar. With its strong national credit and the world's most developed financial markets, the United States has made U.S. bonds a "safe asset" in the eyes of global investors. In order to preserve and increase foreign exchange reserves, countries around the world have purchased large quantities of US bonds, and the US bond and US dollar system has emerged. The US dollar system is essentially based on the credit of the US nationally, absorbs global funds by issuing government bonds and maintains the dominance of the US dollar in the international monetary system. The US government sold Treasury bonds to the Federal Reserve and global investors through the monetization of fiscal deficits. After the Federal Reserve purchased Treasury bonds, it invested the base currency to increase market liquidity, and the US dollar was able to flow continuously to the world.

The operation of the US dollar system is based on global investors' trust in the credit of US nationality. As the world's largest economy, the United States has rich resources, strong scientific and technological innovation capabilities and military strength, and is considered to have strong debt repayment capabilities. U.S. Treasury bonds are characterized by strong liquidity and relatively stable returns, attracting global investors. Central banks of various countries regard U.S. bonds as an important part of foreign exchange reserves to maintain stability in the local currency exchange rate and international payment capacity. For example, countries such as China and Japan have long been the main foreign holders of U.S. Treasury bonds.

When the U.S. government encounters a fiscal deficit, it raises funds by issuing Treasury bonds. Treasury bonds are sold globally, and after foreign investors purchase US bonds, the US dollar flows back to the United States. The United States uses these funds to build domestic infrastructure, social welfare expenditures, etc. to stimulate economic growth. At the same time, the Federal Reserve has influenced Treasury bond yields and market liquidity through monetary policy regulation. When the economy is down, the Federal Reserve purchases large amounts of Treasury bonds through quantitative easing policies, lowers Treasury bond yields, reduces financing costs for enterprises and governments, and stimulates investment and consumption; when the economy overheated, it increases Treasury bond yields through interest rate hikes, attracts funds to flow back, and curbs inflation. In this process, the US dollar flows around the world through US debt, maintaining the US dollar's international currency status.

Although the US Treasury and US dollar system has maintained its dominance in the US dollar for a certain period of time, it has many hidden dangers and faces severe challenges. First of all, the scale of US Treasury bonds continues to rise, the fiscal deficit continues to expand, and the pressure to repay debts is becoming increasingly heavy. High debt interest expenditures occupy a large amount of fiscal funds, compressing other public spending space and weakening the U.S. government's ability to deal with economic crises and social problems. Secondly, the credit of the United States has been eroded. In recent years, the arbitrary nature of the US government in fiscal policy, such as frequent disputes over debt ceilings, has caused market concerns about whether the United States will default. In addition, some unilateralist actions by the United States in international affairs have also reduced its global credibility and affected investors' confidence in US debt.

Furthermore, the global trend of de-dollarization is gradually emerging. As emerging economies grow and grow, their dissatisfaction with the hegemony of the US dollar has increased, and they are seeking to reduce their dependence on the US dollar. Some countries have begun to promote local currency settlement, strengthen regional monetary cooperation, and reduce their holdings of US bonds. For example, China signed currency swap agreements with many countries to promote the use of the RMB in cross-border trade and investment; Russia significantly reduced its holdings of US debt, increased its gold reserves, etc. These measures have an impact on the US dollar system of bonds and bonds. If not resolved, the stability of the US dollar system will be seriously threatened and the US dollar's international currency status will also be shaken.

4. Digital USD: A new battlefield for future financial competition

With the rapid development of digital and blockchain technology, the global currency pattern is ushering in profound changes, and the wave of digital currency is sweeping. Since 2009, the market has gradually developed a distributed ledger currency network and the new type of currency has been born. Due to the reserve position of the US dollar in the international monetary system, distributed accounting digital currencies have also formed an ecosystem denominated in US dollars in the development. The digital dollar is exchanged 1:1 with the fiat dollar, and the assets denominated by US bonds and US dollar are used as reserves to ensure redemption, which invisibly reshapes a new US dollar application scenario and US bond storage space, reverses the weakness of US bonds and US dollar in recent years, and injects new value support into the US dollar.

According to the 2024 VISA survey report, the digital dollar stablecoin has grown from its market value of billions in 2020 to more than 200 billion US dollars in 2024. The settlement amount in the first half of 2024 alone exceeded 2.6 trillion US dollars, and the number of user addresses exceeded 100 million, radiating to many countries and regions in the world. Digital US dollars have the characteristics of anonymity, portability and cross-physical area restrictions, and have strong expansion potential. At the same time, digital network decentralized finance (DeFi) and RWA tokenization (such as Ondo Finance to tokenize US debt and sells directly to non-US retail investors and institutions), there is a possibility of moving traditional financial markets to blockchain networks in the future, and its ecosystem mainly uses digital dollar transactions and settlements, which further expands the depth of the digital dollar system. The new application scenarios of the digital dollar, the support of its reserve assets to the dollar, and its expansion potential based on blockchain technology, the three combined have created an ecological opportunity for the development of the digital dollar.

Furthermore, in the real environment, the United States has faced the real challenges of disputes over the US debt ceiling, expanding fiscal deficits and surge in debt repayment pressure. The US dollar objectively needs to seek new value support tools to maintain its international status. In the time window, 2024 is the US election, and the number of people holding and trading digital currencies in the United States is close to 100 million, and it is mainly young. The Trump team needs to win over this group of voters to enhance their campaign chips. As a result, under the combined effect of market ecology, real pressure and political competition, since Trump was elected president, the United States has turned its past attitude of denial and suppression of digital currencies, including his first term, into actively supporting and promoting regulatory legislation, and at the same time announced its high-profile role as the world leader in the digital currency industry. The digital dollar anchor strategy was established. As US Treasury Secretary Bescent said, "We want to consolidate the US dollar's position in international reserve currencies, and we want to achieve this goal through digital stablecoins."

The overall idea of ​​the United States to build a digital dollar system is to include the digital currency ecosystem that has grown wildly in the past into the compliance regulatory system to ensure that the development of the digital currency industry is in line with the national interests of the United States. This can be roughly understood as building a "contractual relationship" between the US dollar and the digital currency network, which is similar to the contractual relationship of the "petroleum dollar", that is, the application scenario of solidifying the US dollar. On this basis, we will gradually guide digital assets to become mainstream assets and expand their global application scope. Together, the overall construction path of digital dollar anchors is formed.

The difficulty lies in the fact that the regulatory framework that matches the traditional US currency and financial system and the digital ecological regulatory framework currently being built will objectively form two parallel systems and rules. The former needs to be stable and rigorous, while the latter needs to be innovative and flexible. It is necessary to ensure the compatibility of this "dual-track" pattern and avoid arbitrage and conflicts in actual operations. This is extremely challenging to the top-level design and rule implementation of regulatory innovation.

The United States passed the GENIUS ACT 2025 US Stablecoin Innovation Guidance and Establishment Act (GENIUS ACT) on May 19, clarifying the regulatory requirements for digital stablecoins for the first time. At the same time, the United States is also actively exploring the possibility of digital assets being included in the reserves. The Trump administration signed a presidential executive order on digital assets on January 23, and at the federal and state levels, as well as regulatory agencies such as the China Securities Regulatory Commission, the Office of Currency Supervision, and the Commodity Futures Trading Commission, will promote a three-dimensional and multi-dimensional digital asset regulatory framework and implementation rules. These measures represent a substantial beginning in the construction of the digital dollar system.

In addition, the launch of the digital dollar also faces many other considerations. At the technical level, how to ensure the security, stability and privacy protection of the digital dollar system are key issues. Digital currency transactions are easily targeted by hackers. Once security breaches occur, they will lead to serious capital losses and user information leakage. At the policy level, the digital dollar may have an impact on the existing monetary policy and financial regulatory system. The issuance of digital dollars may affect the statistics and regulation of money supply and interfere with interest rate policies. How to effectively supervise the issuance, circulation and use of digital dollars to prevent illegal activities such as money laundering and terrorist financing is also a difficult problem that needs to be solved urgently. At the same time, the international promotion of digital dollars may trigger geopolitical games, and other countries may worry that digital dollars will strengthen the US financial hegemony, thereby taking corresponding measures to intensify tensions in the global financial field.

Looking back at the four-stage evolution of the US dollar anchor, from the gold exchange standard of the gold dollar, to the geopolitical and financial binding of the petrodollar, to the debt credit support of the US dollar, now moving towards the exploration of the digital dollar, every change is the United States' strategic choice to adapt to changes in the international political and economic situation and maintain financial hegemony. The evolution of the US dollar anchor not only profoundly changed the global financial landscape, influenced the economic development and financial stability of various countries, but also reflected the rise and fall of the global economic power balance and the changes in international political relations.

At present, the global economy is in a period of deep adjustment, with emerging economies rising, frequent geopolitical conflicts and surging digital technology revolutions. The international monetary system dominated by the US dollar is facing unprecedented challenges. The internal contradictions in the US debt and dollar system are constantly accumulating, and the future of the digital dollar is full of uncertainty. Against this background, all countries should deeply understand the evolution laws of the US dollar anchor, actively adjust their financial strategies, strengthen financial innovation and cooperation, and enhance their own financial strength and risk resistance. For China, we should accelerate the internationalization process of the RMB, improve the financial market system, promote the research and development and application of digital currency, seize opportunities in the reshaping of the global financial landscape, enhance the voice of international finance, and contribute China's strength to the stability and development of the global economy and finance. In the future, the global monetary system may develop towards diversification, and a new monetary order is being born, and the continuous evolution of the US dollar anchor will be a key variable in this process, which deserves continuous attention and in-depth research.