Written by: Miloš Stevanović and Duško Karišik

The U.S. dollar has had the status of the world’s primary reserve currency and the backbone of international trade for decades. However, in recent years new trends have emerged that raise questions about the future role of the “king” dollar in the global economy. Inflation in the U.S. and the Federal Reserve’s response, efforts by certain countries to reduce reliance on the dollar (so‑called dedollarization), and geopolitical tensions—especially between the U.S. and China—all together affect the value of the dollar and global financial flows. This article analytically examines current trends related to the dollar and projections for the coming decade, focusing particularly on how changes in the value and role of the dollar might resonate in Bosnia and Herzegovina’s economy. Special attention is paid to the transmission channels of dollar effects to BiH (imports, foreign reserves, credit system, link with the euro) and potential monetary and fiscal policy responses, with strategic recommendations to strengthen BiH’s resilience.

Global trends related to the dollar: inflation, dedollarization, and geopolitics

Inflation moderation and interest rates: After a period of high U.S. inflation during 2021–2022 (peaking at 9.1%), consumer prices began rising more slowly. In a March report it was noted that prices increased roughly 3.5% year‑on‑year—dramatically lower than the peak. The inflation slowdown occurred despite substantial fiscal spending during the pandemic and rising U.S. public debt. The U.S. Federal Reserve aggressively raised interest rates to curb inflation, which strengthened the dollar on world markets. However, high rates made borrowing in dollars more expensive, hitting especially companies and countries with U.S.‑denominated debt. Some developing countries thus have economic motivations to reduce dependence on the dollar and the high costs of servicing dollar‑based debt. Meanwhile, the enormous U.S. public debt (over USD 34 trillion) raises concern, but analysts like Morgan Stanley strategists believe it does not undermine confidence in the dollar for now thanks to its status as a liquid safe‑haven asset. In other words, investors still see the dollar as a reliable refuge in crises, giving it stability despite U.S. fiscal risks.

Dedollarization and alternative currencies: Globally, the trend of dedollarization—initiatives by countries to reduce reliance on the U.S. dollar in trade and reserves—is gaining momentum. A group of large economies such as the BRICS (Brazil, Russia, India, China, South Africa) is openly working to create alternatives. BRICS representatives are discussing introducing a common currency based on a basket of their currencies (real, ruble, rupee, rand, yuan) to protect in the long term from a potential “dollar collapse.” Motivations include reducing vulnerability to dollar fluctuations and Western financial sanctions. After Western countries froze roughly half of Russian foreign reserves in 2022 and excluded Russian banks from SWIFT, many governments recognized the risk of relying exclusively on the dollar. Even Brazilian President Lula da Silva stated that countries not using the dollar should not be forced to trade in it, advocating a BRICS currency for greater payment sovereignty. In that context, the Chinese yuan is increasingly significant in global trade—in Russia in February 2023, the yuan surpassed the dollar as the most traded currency. China and its Russian partners now increasingly conduct mutual business in yuan or rubles rather than dollars. Countries like the UAE and India are negotiating using national currencies (e.g. Indian rupee) for mutual trade. These trends indicate a gradual decline in dollar dominance—the share of the dollar in global foreign reserves has fallen to around 60%, the lowest level in several decades. However, economists caution that replacing a dominant currency takes decades, and the U.S. dollar has no serious competitor yet in terms of trust and liquidity. Morgan Stanley strategists assess that the “king dollar” is still irreplaceable: the Chinese yuan is not yet liquid enough due to China’s capital controls, and cryptocurrencies are too volatile to be a true alternative. Thus, despite loud dedollarization rhetoric (which represent a long‑term challenge to dollar hegemony), the consensus is that the dollar will maintain its primacy in international finance for the next 10 or so years—both as a global reserve currency and as a crisis safe haven.

Relations with China and other powers: Geopolitical background significantly affects the future of the dollar. The U.S. and China are in economic competition: trade tensions, a tech war, and restrictions contribute to a gradual “decoupling” of the two largest economies. As noted by an analysis in Blic Biznis, Washington–Beijing relations are now more strained than ever, and U.S.–China conflicts impact global stability and capital flows. China, on one hand, seeks to reduce dollar dominance—continuously increasing its gold reserves and promoting the yuan in international use. Some Southeast Asian countries already hold part of their reserves in yuan and yen rather than solely dollars. Beijing strives to pay for energy imports and other goods in yuan, which is attractive to partners as they can use that yuan to buy Chinese products (China is a massive exporter). Still, the Chinese yuan faces limitations—principally strict capital controls maintained by China and slowdown in its economy (weak consumer demand and real estate crisis), undermining the yuan’s appeal as a stable currency.

Besides China, Russia is a special case: after sanctions in 2022, it was almost excluded from the dollar financial system, so Moscow is rapidly shifting to trade in rubles and yuan. Since 2014 (the annexation of Crimea), Russia has been reducing its dollar share in reserves in favor of euros and renminbi. Today, most trade between Russia and China occurs in their national currencies. Though the Russian ruble is unstable and dependent on administrative measures, Russia’s strategy is clear—to minimize use of “Western” currencies to avoid financial blockades. Through these moves, Russia and its partners attempt to weaken dollar dominance “through the back door,” even without a unified new currency: if a large enough bloc of countries (BRICS and new associated members like Saudi Arabia, UAE, Egypt, etc.) require mutual payment in national currencies, the sphere of influence of the “king dollar” could shrink. Of course, the Euro‑Atlantic financial system remains dominant—the EU and U.S. together account for a huge share of the world economy, and the euro remains the second‑rank global currency (~20% share of reserves). No single currency currently threatens full dollar dominance, but multipolar trends in finance are gradually strengthening.

Impact of the Dollar on Major Economies (EU, China, Russia)

European Union (Eurozone):
Fluctuations in the USD/EUR exchange rate directly affect the EU’s economy. A stronger dollar (i.e. a weaker euro) makes imports more expensive for European countries—especially commodities and raw materials priced in dollars—effectively causing Europe to “import inflation.” For example, when the euro weakened from around 1.15 USD/EUR in 2022 to parity with the dollar, eurozone countries faced higher fuel and gas prices, which further fueled inflation and production costs. The European Central Bank responded by raising interest rates to curb inflation—partly mimicking the Fed—while attempting to prevent excessive euro weakening. A stronger euro is generally more favorable when import prices are high; conversely, a weaker euro can boost EU exports in the short term by making them more competitive. However, since the EU is a net importer of energy, the negative effects on trade balances and prices generally outweigh export benefits. Thus, the EU closely monitors U.S. monetary policy: unexpected tightening of U.S. financial conditions could slow European growth (e.g., via reduced global demand or financial turbulence). In coming years, the EU aims to strengthen the euro’s international role—promoting euro-denominated commodity invoicing (e.g., oil) and building financial infrastructure independent of U.S. influence. Realistically, the euro and dollar will continue to coexist interlinked: sudden moves in one inevitably impact the other, with consequences for inflation and trade across both sides of the Atlantic.

China:
As the world’s second-largest economy, China has long been tied to the dollar. The Chinese yuan (RMB) has had a semi-fixed exchange rate to the USD, and China has accumulated massive dollar reserves (investing in U.S. Treasury bonds) to maintain export competitiveness. Changes in dollar value affect China in multiple ways. A stronger dollar makes Chinese exports to the U.S. cheaper for American consumers (benefiting exporters), but also often triggers capital flight from emerging markets, as investors seek safety in dollars—putting pressure on Chinese financial markets. The Bank of China occasionally intervenes to maintain yuan stability vs. the dollar to avoid disruptions. A weaker dollar typically means yuan appreciation, hindering exports but easing China’s import costs for dollar-priced resources (e.g., oil, minerals). Strategically, China has been promoting yuan internationalization: securing bilateral currency swap agreements with other nations, opening its financial markets to yuan-denominated bond trading, and encouraging RMB-denominated trade. Success depends on global confidence—and China’s capital controls, conversion restrictions, slower growth, and real estate sector troubles weaken yuan’s appeal compared to the dollar. Over the next decade, China is likely to continue diversifying reserves (more gold, fewer USD) and increasing yuan use in trade (especially with its partner developing nations), yet completely displacing the dollar from Asian or global markets remains difficult without deep financial reforms.

Russia and Emerging Economies:
Russia’s relationship with the dollar is paradoxical: it historically benefited from oil and gas revenues priced in dollars, but now views the dollar as a symbol of vulnerability due to its use in sanctions. Following its Western isolation, Russia has been rapidly shifting trade away from the dollar—conducting energy trade in euros, rubles, or yuan and diverting reserves from USD toward gold and Chinese currency. The ruble temporarily strengthened in 2022 due to capital controls and forced currency conversion but later weakened again as inflows slowed—demonstrating that without access to dollar-based global markets, Russia faces high volatility. Other countries like Turkey, Iran, Argentina, and some Latin American states also seek to reduce dollar dependence in response to economic crises. For instance, Turkey increasingly trades in local currencies with neighbors; but that also comes with risks when monetary policy is mismanaged, as evidenced by severe depreciation of the Turkish lira due to double-digit inflation and weak central bank independence. In contrast, Bosnia and Herzegovina (addressed further below) maintains a fixed exchange rate to the euro and enjoys price stability: there’s virtually no risk of sudden currency depreciation, as shown even during major global shocks. Countries with financially unstable currencies typically “run to the dollar” for stability—like citizens in Argentina or Venezuela saving in USD to protect against hyperinflation. Thus, the dollar remains a “fear factor” for many emerging markets forced to rely on it amid local currency unreliability. Going forward, while developed economies aim to gradually reduce dollar reliance, many emerging economies will continue to seek alternatives. Nonetheless, the U.S. dollar remains the dominant benchmark, with every movement in its value or interest rates cascading from Frankfurt through Moscow and Beijing to small economies like BiH.

How Changes in the Dollar’s Value Affect Bosnia and Herzegovina’s Economy

Country Background: Bosnia and Herzegovina operates under a currency board system, fixing the domestic currency (convertible mark, KM) to the euro at a rigid rate (1 EUR = 1.95583 KM). The Central Bank issues money only with 100% foreign currency backing, mostly in euros. This means BiH has no direct monetary policy relative to the dollar; dollar effects are transmitted indirectly via the EUR/USD exchange rate. If the dollar strengthens vs. the euro, the KM proportionally weakens vs. the dollar—and vice versa. As Professor Sanel Halilbegović remarks: “Our mark is tied to the euro; if its value drops, the impact reflects on our currency.”

Import Prices and Inflation: BiH is a small open economy heavily reliant on imports—especially energy, raw materials, industrial goods, and agricultural products—priced in USD. A stronger dollar means higher euro/KM costs for dollar-priced imports, worsening BiH’s trade deficit and fueling inflation. Notably, the strong dollar in 2022, combined with rising oil prices and a weakening euro, drove inflation in BiH to about 17.5% year-on-year by October 2022—the highest in decades. Consumers felt the squeeze on fuel, food, and other imports. Conversely, a weaker dollar (stronger euro) lowers dollar-denominated import prices in KM, helping reduce inflationary pressure. A Lider Media commentary noted that a strong dollar effectively causes European economies to “import inflation,” while its impact is smaller in less dollar-dependent economies. In BiH’s case, import dependency is high, so EUR/USD dynamics significantly influence every liter of fuel or kilowatt-hour electricity.

Foreign Reserves and Exchange Rate: The stability of the KM is maintained through BiH’s foreign reserves, almost entirely held in euros. This structure means dollar fluctuations do not directly affect the nominal KM exchange rate (fixed), nor significantly impact Central Bank’s balance sheet—its exposure to the dollar is minimal. If the dollar weakens versus the euro, the euro-denominated reserves rise in dollar terms, but since liabilities remain in euros/KM, the net effect is neutral. The currency board system anchors macroeconomic stability, preventing sudden currency crises or loss of trust in the KM. The IMF emphasizes preserving this system as a key stability buffer. BiH benefits from a stable currency relative to neighbors vulnerable to devaluation under external shocks.

Credit System and Debt Exposure: While credit and deposits in BiH are almost entirely denominated in KM/EUR, global dollar market developments still have indirect effects. When the Fed raises rates, dollar capital becomes more expensive, and investors often shift to dollar-safe assets in the U.S. For smaller economies, this means less foreign investment or higher cost of external financing. Although BiH finances primarily via international institutions (IMF, World Bank) and euro-denominated eurobonds, global risk premia shifts (e.g. capital fleeing to safe dollar assets) can force BiH to offer higher interest rates on its bonds to attract investors. In the private sector, few companies hold USD-denominated liabilities, which would become costlier in KM terms if the dollar strengthens—fortunately such cases are rare. A more indirect effect comes from the European Central Bank: when the Fed hikes, the ECB often follows to prevent euro weakening and curb imported inflation. Consequently, eurozone benchmark rates have risen to around 4%, leading to higher Euribor-based rates in BiH loans. Despite costlier borrowing, total loans in BiH reportedly grew nearly 10% in 2023, showing resilience. However, banks under the currency board cannot rely on a lender-of-last-resort central bank; they must manage liquidity conservatively, often parking surplus abroad. With rising Euribor, some liquidity has returned to domestic lending. Overall, dollar conditions influence BiH through global financial conditions: higher dollar rates make capital more expensive everywhere; relaxed Fed policy can increase investment flows into emerging markets, benefiting BiH.

Euro Link and Trade Environment: BiH’s main trading partners are eurozone countries (Croatia, Germany, Italy, Slovenia, Austria), transacting in euros. BiH’s monetary policy effectively mirrors the eurozone: ECB moves translate directly to BiH via the fixed exchange rate. Therefore, euro movements may matter more directly for BiH than dollar moves—but since EUR/USD is a key global metric, BiH still senses dollar shifts indirectly. For example, if U.S. actions trigger eurozone recession (reducing demand for BiH exports) or commodity price spikes (as in 2022), BiH faces lower exports and costlier imports. The Western Balkans region is highly eurized—alongside BiH (with its formal euro peg), Montenegro uses the euro, and Serbia and North Macedonia often denominate large transactions in euros. The region thus pays more attention to EUR/USD than USD/local currency. However, remittances from the diaspora—especially from North America—are partially in dollars. A strong dollar means more KM sent per dollar, boosting consumption; a weaker dollar has the reverse effect. Hence, the dollar still plays a dispersed role in public finances.

Monetary Policy and Fiscal Stability of Bosnia and Herzegovina in the Context of the Dollar

Monetary Policy Limitations:
BiH's monetary policy is inherently restricted under the currency board regime: the Central Bank cannot freely set interest rates, emit money at discretion, or directly intervene in Forex markets. Its sole mandate is to preserve the fixed peg to the euro. This arrangement has provided decades of stability—economists often cite the stable convertible mark and strong monetary system as rare success stories in BiH's history. The country voluntarily relinquished independent monetary control after the turbulent 1990s to tame inflation and build trust in its currency. That strategy has proven effective.

However, in the face of global shifts in the value of the dollar and other currencies, the question arises: does BiH possess any protective tools apart from the currency board itself?

Essentially, BiH's monetary authorities can only ensure stability through strict adherence to currency board rules. Any deviation—such as central bank financing of the budget or altering the peg—would be extremely risky and could undermine confidence. Thus, preserving the fixed euro peg remains an absolute priority. The Central Bank maintains full coverage of monetary base with foreign reserves, typically holding over 100% coverage (known as net foreign assets), which allows a buffer in case of valuation changes in reserves (e.g. GOLD price shifts or USD/EUR swings).

Fiscal Stability and Indirect Dollar Impact:
Dollar-derived shocks influence fiscal stability indirectly via economic cycles. If a strong dollar and high global interest rates lead to recession in Europe, BiH may face reduced revenues (Weaker exports, lower VAT, corporate and income tax) and increased expenditure needs (e.g. social support to cushion rising unemployment). In the 2022 crisis, authorities increased public sector wages and social benefits to alleviate price pressures, which helped citizens short‑term but significantly widened the fiscal deficit. By early 2024, projections estimated the deficit rising to around 2.5% of GDP (up from ~0.7% previously), driven by these accumulative spending increases. Both entities in BiH aim to issue bonds or borrow externally (e.g. Republika Srpska plans ~810 million KM in cross-border financing in 2024). Thus exposure to international markets means that if external conditions worsen (e.g. expensive borrowing due to a strong dollar and high global rates), BiH may face limited access or high borrowing costs. The IMF recommends contingency plans in case planned financing fails. It also advocates reconstituting fiscal reserves—cutting recurrent spending, reforming public administration and social transfers—to build budget buffers for resilience in crises.

Limits of Adjustment Options:
BiH cannot devalue its currency to boost export competitiveness, nor can it "print" money to cover deficits. This is a double-edged sword: it prevents irresponsible policy and protects against hyperinflation—but also requires strict discipline. Adjustment must occur through real sector reforms: wage moderation, price deregulation, labor market flexibility, and fiscal restraint. If dollar-driven import cost shocks lead to a current account deficit, BiH must offset through capital inflows (e.g. FDI, loans) or, if needed, drawing on reserves to defend monetary stability.

Thankfully, past crises—such as the 2008 global financial crisis and the 2020 pandemic—demonstrated the resilience of the currency board: reserves remained intact and the exchange rate held firm. Political risks domestically—such as secession threats or institutional gridlock—currently pose greater threats than fluctuations in the dollar. Still, given global unpredictability, preserving investor and international institution confidence remains crucial: maintaining cooperation with the IMF (which serves as safety net) and strengthening the investment climate ensures that capital inflows remain robust even amid tectonic global shifts.

Strategic Recommendations for Strengthening Bosnia and Herzegovina’s Resilience to Dollar Fluctuations

Based on the above analysis, the following strategic directions can enhance BiH’s resilience amid variable dollar value and global economic trends:

1. Preserve the Currency Board and Euro Peg:
   Continuity in maintaining the KM–EUR peg and adequate foreign reserves coverage remains the foundation. The currency board has effectively anchored stability, and the IMF underscores its importance as a stabilizing anchor. Any deviation (e.g. monetary financing or modifying the peg) would introduce substantial risk. As BiH progresses toward EU membership, a formal transition to the euro could eliminate residual currency risk—but until then, disciplined adherence to the current regime is essential.

2. Fiscal Prudence and Building Fiscal Buffers:
   When monetary flexibility is absent, fiscal policy becomes the primary tool for stability. Authorities should curb non‑productive spending, control wage growth in the public sector, and target social support effectively. Returning to a mid‑term fiscal surplus—as recommended by the IMF—allows reserve accumulation for crisis response. Reducing public debt and maintaining low deficits provide fiscal space to borrow affordably under external shocks. Entities should pre‑plan alternative financing routes (e.g., domestic bonds, development bank credit) should global markets become inaccessible or too expensive. Establishing a fiscal rule or stabilization fund (e.g., a liquidity fund used in good times) helps spread external shocks over time.

3. Diversify Trade Partners and Currency Invoicing:
   While EU remains the principal partner, exploring markets outside the EU (e.g. Middle East, Asia, Africa) lessens regional dependency. For such engagements, negotiating trade settlements in euros (or even BAM) where possible—rather than USD—reduces currency risk. Where dollar invoicing is unavoidable, companies should employ hedging mechanisms (e.g. forward contracts, options). Regional initiatives like Open Balkan or CEFTA can promote intra-regional trade in local currencies or euros, reducing collective USD exposure. As global dedollarization evolves—for example, China offering discounts for yuan payments—BiH should remain alert and responsive.

4. Reduce Import Dependency on Dollar‑Denominated Goods:
   Long-term protection lies in boosting domestic production and energy independence. Investing in renewable energy (hydro, wind, solar) and exploring domestic oil or gas processing helps insulate BiH from volatile dollar-priced energy imports. Supporting agriculture and local food industries reduces food import reliance. Each reduction in imported base commodities strengthens resilience to currency shocks. Concurrently, enhancing export competitiveness through higher value-added production attracts foreign currency income independent of dollar cycles.

5. Strengthen the Financial Sector and Oversight:
   Regulatory authorities (CBBiH, banking agencies) need to continue monitoring the currency composition of corporate and bank balance sheets. Foreign or currency-clause loan portfolios should be limited to borrowers with natural hedges (income in that currency). High eurization of the system (95%+ of deposits and loans in KM/EUR) is beneficial, reducing household currency risk. However, banks should maintain high capital and liquidity buffers to handle sudden deposit outflows toward safer assets in crises. Establishing a financial stability fund to recapitalize banks or provide liquidity in emergencies would significantly reinforce the safety net. Conservative risk management and proactive scenario testing (e.g., stress tests with extreme EUR/USD moves and indirect effects on BiH banks) are essential. Transparency and anti-money laundering controls also ensure international trust; any placement of BiH on gray lists (e.g., Moneyval) could damage perception and cause capital flight during fragile times.

6. Advance Regional and International Cooperation:
   In a multipolar world of dollar, euro, and yuan spheres, BiH should clearly align economic policy with the EU space—maintaining integration with EU law (including financial regulation) supports stability and may eventually facilitate euro adoption. Continued collaboration with international institutions (IMF, World Bank, EBRD) ensures ready access to liquidity or support if the country faces a crisis. Regional bank and finance cooperation—like central bank swap lines or a shared solidarity fund—can create a collective buffer against external turbulence. BiH can also monitor experiences of regional peers: Serbia’s managed floating dinar, or Croatia’s euro adoption in 2023, offer lessons for potential future choices.

The bottom line: the U.S. dollar will remain a critical global benchmark in coming years. While talk of a post‑dollar era grows louder, in reality every shift in the dollar has global implications. For Bosnia and Herzegovina—a small open economy pegged to the euro—stability and predictability are paramount. The most resilient path involves strengthening internal fundamentals: maintaining a strong currency regime and public finances, diversifying the economy, and nurturing dependable international partnerships. That way, shifts in dollar value or role become manageable changes rather than threats to growth. With a solid convertible mark and integration-oriented policies, BiH has the opportunity to build economic resilience and maybe even benefit from global changes rather than succumb to them. Wise policy today is key to readiness for tomorrow.

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