Dollar hegemony is the hypothesized monetary hegemony of the US dollar in the global economy. It describes the phenomenon in which the U.S. dollar, a fiat currency, became the primary reserve currency internationally.The developments that allowed the dollar hegemoney to emerge were:
- The fixed exchange rate regime based on a gold-backed dollar (Bretton Woods regime), and later the suspension of this regime.
- A deal between U.S. authorities and OPEC to price oil in dollars in return for military protection of oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup.
- The emergence of deregulated global financial markets after the Cold War that made cross-border flow of funds routine.
The dollar hegemony cause central banks to be forced to hold more dollar reserves than they otherwise need to ward off sudden speculative attacks on their currencies in financial markets. Also the dollar hegemony prevents the exporting nations from spending domestically the dollars they earn from the U.S. trade deficit and forces them to finance the U.S. capital account surplus, thus shipping real wealth to the U.S. in exchange for the privilege of financing U.S. debt to further develop the U.S. economy.