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Tariffs and Inflation However, policy shifts under the US administration are likely to US dollar has been loosing share as a global reserve Currency

push inflation higher in the near term as policies like higher
tariffs or immigration restrictions may act as negative supply 70.0 US dollar as a share of global reserve currencies (% quarterly basis)
The global economy is emerging from the most significant shocks, reducing output and further driving up prices.
inflation surge in recent memory. After peaking at 8.6 per cent Higher inflation could prevent the Federal Reserve from 65.0
in 2022, during Russia’s invasion of Ukraine, global inflationary cutting interest rates and might even compel rate hikes,
pressures have gradually started to ease. The IMF estimates strengthening the US dollar and widening external deficits. This
that global headline inflation will moderate to 4.3 per cent and tightening of US monetary policy, combined with a stronger 60.0
3.6 per cent in 2025 and 2026 respectively. dollar could exacerbate financial conditions, particularly for
emerging markets and developing economies.
55.0
Global headline inflation (y-o-y%)
10.0 US DOLLAR WEAKENS AMID RISING
9.0 8.6 UNCERTAINTY ABOUT US POLICYMAKING 50.0
8.0 2016 2017 2018 2019 2020 2021 2022 2023 2024
7.0 6.7
6.0 5.8 The US dollar has been weakening of late due to a Source: IMFCOFER, as of January 2025.
5.0 4.7 4.2 combination of factors, including uncertainty about US
4.0 3.8 3.3 3.5 3.2 policymaking, which has led to a flight out of the US dollar and
3.0 Treasuries. Since the beginning of the current year, the dollar
2.0 The Euro and the Japanese Yen are other significant currencies efforts are a part of the long-term strategy to reduce the
1.0 index has declined by more than 4 per cent as of March in global trade. The Euro is the second most held reserve dependence on the dollar. China’s share of trade invoiced in
4
0.0 2025 . Moreover, the weakening of the US dollar has led other currency, accounting for around 20 per cent of global reserves renminbi has grown from 20 per cent a decade ago to 56 per
Average 2020 2021 2022 2023 2024 2025(F) 2026(F) 2029(F) currencies to appreciate against it, especially safe havens such while the Japanese Yen is a distant third. cent today partly driven by the limitations of the US led
2000-2019
5
as the Japanese Yen, the Swiss franc, and the Euro. The recent
international financial system in serving developing countries.
turmoil in both the US stock and bond markets, with
investors selling off shares and Treasuries amid concerns Further, the US dollar's dominance as a reserve currency is
Note: F is Forecast about the impact of tariffs on corporate growth and Share of allocated forex reserves
Source: World Economic Outlook, IMF (April 2025) (Q3 2024, %) facing increasing pressure as countries react to its
investment, has further exacerbated the dollar's decline. "weaponization" through sanctions and the dollar payment
57.4 system. This trend is particularly noticeable after the
Russia-Ukraine war, where the freezing of US$300 billion of
Movement in US Dollar Spot Index Russian Central Bank assets in the dollar system sparked
concerns about the reliability and fairness of the system.
115.00
20.0 Already, an increasing number of countries, including US
110.00 partners such as India, have explored ways to continue trading
5.8 5.0 4.5
105.00 2.7 2.3 2.2 0.2 with Russia without using the US dollar. Iran has officially
replaced the US dollar with the Russian rouble in its trade
Chinese renminbi
Canadian dollars
Pounds Sterling
100.00 104.13 US dollars Euro Swiss francs relations with Russia. Additionally, the Commonwealth of
95.00 Japanese yen Other Currencies Australian dollars Independent States (CIS), including countries like Armenia,
Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, and Moldova, have
90.00 also moved away from using the US dollar in international
Source: Currency Composition of Official Foreign transactions. This shift is part of a broader trend known as
85.00
Exchange Reserves (COFER), IMF de-dollarization, where countries seek to reduce their
80.00 reliance on the dollar for international transactions.
75.00 These currencies play pivotal roles in international finance and In addition, with the banks promoting digital currency, trade
Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Sep-18 Apr-19 Nov-19 Jun-20 Jan-21 Aug-21 Mar-22 Oct-22 May-23 Dec-23 Jul-24 Feb-25 trade, influencing exchange rates, investment flows, and global settlements are likely to avoid dollar transactions. With faster
stability.
transaction times and enhanced transparency, the digital
currencies including cryptocurrencies and central bank digital
Source: Barchart.com, Inc. GRADUAL DIVERSIFICATION OF CURRENCIES IS currencies (CBDCs) could turn out to be attractive for
DIMINISHING THE DOMINANCE OF THE US international trade. However, adoption of digital currencies for
US dollar as a reserve currency DOLLAR trade settlements is still in its early stages and represents only
a small portion of global trade. Regulatory challenges, security
Looking ahead, while the US dollar is expected to remain the concerns, and the volatility of digital currencies are few
The US dollar has held the position of world’s primary reserve to as the “exorbitant privilege” of the US. As of third quarter of reserve for the foreseeable future, its importance is obstacles that still need to be addressed.
currency since the end of World War II. Its dominance stems 2024 (July-Sept), about 57.4 per cent of the allocated foreign diminishing as there is a gradual diversification of currencies
from the size and strength of the US economy, its stability, and exchange reserves were held in US dollars. This is the smallest through the development of new financial ties and In conclusion, while the share of US dollar in global reserve
the widespread use of the dollar in global trade and finance. Its share since 1994 and represents a decline of almost 9 per cent infrastructure. China, for example, has established around 40 may continue to moderate over time, it is likely to maintain its
status as the leading reserve currency has often been referred over the past decade. bilateral currency swap lines with developing countries. These dominant position in the near and medium term

4 As per the recent data, dollar index has further weakened to 98.38 as on 21st Apr 5 https://carnegieendowment.org/research/2024/10/chinas-dollar-dilemma?lang=en

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APRIL 2025