The international monetary system is undergoing a profound transformation, steadily moving away from an overwhelmingly dollar-centric order toward a multipolar financial architecture. Developments in 2025 have significantly weakened confidence in the US dollar, with global repercussions that directly affect emerging economies like Pakistan.
Trade disruptions triggered by “reciprocal tariffs,” unprecedented volatility in US financial markets, large-scale sell-offs of dollar-denominated assets, and repeated shutdowns of the US federal government have collectively eroded the perception of the dollar as a stable global anchor. In the first half of 2025 alone, the US dollar index fell by over 10%, while gold prices surged nearly 68%, underscoring a global search for safer and more diversified stores of value.
For Pakistan—an import-dependent economy with chronic balance-of-payments pressures—these shifts are not merely theoretical. They directly influence exchange rate stability, foreign reserves management, debt sustainability, and trade financing.
Erosion of the Dollar’s “Safe Haven” Status
In April 2025, global markets witnessed a rare and alarming phenomenon: a simultaneous collapse in US equities, bonds, and the dollar. Traditionally, US Treasury securities serve as safe assets during market stress. However, escalating trade tensions and investor panic triggered a synchronized sell-off.
Over just two trading days, major US stock indices recorded double-digit declines, while yields on long-term US Treasury bonds spiked sharply. The dollar weakened further, challenging the long-standing belief that US assets provide unconditional safety during global turmoil.
From a Pakistani perspective, this matters deeply. Pakistan’s external debt, largely denominated in dollars, becomes more volatile when confidence in dollar assets fluctuates. Moreover, global risk aversion can restrict access to international capital markets, increase borrowing costs, and intensify pressure on the rupee.
Structural Weaknesses Behind Dollar Decline
The weakening of the dollar in 2025 is not an isolated market correction; it reflects deeper structural concerns:
Macroeconomic Pressures
Cooling inflation, a softening US labor market, and anticipated interest rate cuts by the Federal Reserve have narrowed interest rate differentials, reducing the dollar’s attractiveness relative to other currencies.
Fiscal Sustainability Concerns
US federal debt has surpassed $38 trillion, with rising interest payments consuming an increasing share of government revenue. Persistent fiscal deficits have fueled doubts about long-term debt sustainability—concerns closely monitored by countries like Pakistan that rely on dollar-based financial systems.
Weaponization of the Dollar
The frequent use of the dollar as a geopolitical tool—through sanctions and trade restrictions—has accelerated global efforts to reduce reliance on the US-led financial order. For Pakistan, which has faced financial conditionalities and external shocks, this trend opens both risks and opportunities.
The Global Rise of “De-dollarization”
What was once a fringe discussion has now evolved into coordinated global action. Countries across Asia, Africa, and Latin America are increasingly settling trade in local currencies, diversifying reserves, and reducing exposure to dollar-denominated assets.
IMF data indicates that the dollar’s share in global foreign exchange reserves fell to nearly 56% in mid-2025, marking its lowest level in three decades. Central banks are shifting toward a diversified reserve strategy that includes gold, regional currencies, and domestic assets.
For Pakistan, this trend highlights the importance of:
- Diversifying foreign exchange reserves
- Expanding bilateral currency swap arrangements
- Reducing excessive dependence on dollar-based trade settlement
Gold’s Resurgence and Implications for Pakistan
Gold has emerged as the most prominent beneficiary of declining trust in the dollar. By 2024, gold accounted for nearly 20% of global reserve assets, surpassing the euro and becoming the second-largest reserve asset globally.
Central banks worldwide have purchased over 1,000 tons of gold annually since 2022. This shift reinforces gold’s role as a hedge against currency instability and sovereign risk.
For Pakistan, which holds relatively modest gold reserves compared to peers, this trend raises strategic questions about reserve composition, long-term stability, and protection against external shocks.
Towards a Multipolar Monetary Order
Experts increasingly agree that the global system is not transitioning to a “post-dollar” era, but rather to a multi-currency system where the dollar remains dominant but shares space with other currencies—most notably the euro and the Chinese renminbi (RMB).
China’s expanding role in global trade and finance, coupled with the gradual internationalization of the RMB, presents Pakistan with new strategic possibilities. As a key partner in the China–Pakistan Economic Corridor (CPEC), Pakistan stands to benefit from greater use of RMB-based trade settlement and financing, potentially easing pressure on dollar reserves.
What This Means for Pakistan
The shift toward a multipolar monetary system carries several implications for Pakistan:
- Strategic Diversification: Pakistan must gradually diversify reserves and trade settlement mechanisms to reduce dollar vulnerability.
- Regional Integration: Strengthening financial cooperation with China, the Gulf states, and regional blocs can enhance resilience.
- Risk Management: A more complex global system demands stronger institutional capacity to manage exchange rate volatility and capital flows.
- Policy Coordination: Monetary and fiscal authorities must adapt to a world where no single currency provides absolute stability.
Conclusion
The international monetary system is entering a period of reconstruction rather than collapse. The dominance of the US dollar is weakening, not disappearing, giving rise to a multipolar financial order anchored by multiple currencies and assets.
For Pakistan, this transformation presents both challenges and opportunities. By adapting early—through diversification, regional cooperation, and prudent macroeconomic management—Pakistan can better navigate global financial uncertainty and strengthen its economic sovereignty in an increasingly complex world.
