Few currencies in history have achieved the level of dominance held by the US dollar. From Wall Street to the streets of Lima, Bogotá, and Buenos Aires, its green notes represent more than a medium of exchange—they embody trust, power, and stability in an increasingly volatile global economy.
In Latin America, where inflation cycles and currency devaluations are part of everyday financial life, the dollar stands as both a shield and a challenge. It protects savings when local currencies falter, yet it also exposes economies to the monetary decisions made thousands of miles away by the Federal Reserve in Washington, D.C.
Understanding how the dollar shapes Latin America is essential not only for economists and policymakers, but also for ordinary citizens trying to preserve the value of their savings. As TodayDollar.com often highlights, the power of the dollar reaches far beyond the United States—it influences everything from local grocery prices to national debt levels.
The Global Dominance of the US Dollar
The United States dollar became the world’s dominant currency after World War II, when the Bretton Woods Agreement established a financial system in which most global currencies were pegged to the dollar, and the dollar itself was backed by gold. Although that system ended in 1971 when President Richard Nixon suspended the dollar’s convertibility into gold, the greenback retained its supremacy.
Today, according to the International Monetary Fund (IMF), the dollar accounts for more than 58% of global foreign exchange reserves—far surpassing the euro, yen, or yuan. The World Bank estimates that more than half of all international trade transactions are settled in dollars, regardless of whether the United States is directly involved.
This dominance creates a unique paradox: the dollar is a national currency that functions as a global public good. Its stability benefits international trade and finance, but its control remains in the hands of one country—the United States.
The Dollar as a Symbol of Stability
Why does the world trust the dollar? The answer lies in the strength of the US economy, its political institutions, and the unparalleled liquidity of its financial markets. US Treasury bonds, for example, are considered the safest assets in the world, serving as a benchmark for global interest rates.
When uncertainty strikes—whether it’s a war, a pandemic, or a banking crisis—investors rush to buy dollars and US Treasuries, seeking safety. This “flight to quality” reinforces the dollar’s strength, even during times of US domestic turbulence.
For developing regions like Latin America, the dollar’s stability offers protection against local economic shocks. But it also reinforces dependence, as many countries price exports, import goods, and even borrow money in a currency they don’t control.
Latin America’s Dollar Dependence: A Double-Edged Sword
Across Latin America, the US dollar is both a stabilizer and a source of vulnerability. Its influence extends deep into everyday financial decisions—from how families save money to how governments plan budgets.
In nations like Ecuador and El Salvador, the dollar is not just a benchmark—it’s the official currency. These countries have adopted dollarization as a means of stabilizing inflation and restoring confidence after years of economic turmoil. While this approach curbs local inflation, it also eliminates the ability to implement independent monetary policy.
In partially dollarized economies such as Peru or Bolivia, the dollar coexists with local currencies. Many citizens hold savings or conduct large transactions in dollars, viewing it as a safer store of value compared to the local currency, which may fluctuate with political or fiscal instability.
Everyday Impact on Latin Americans
Consider a small business owner in Lima. When the local currency depreciates, the cost of imported goods—priced in dollars—rises immediately. Inflation trickles down to the consumer, eroding purchasing power. On the other hand, those who hold dollar savings see their wealth preserved or even increased when the exchange rate climbs.
This dynamic creates a financial divide between those who have access to dollars and those who don’t. For the middle class, earning in local currency but saving in dollars is a way of self-defense against devaluation. For the poor, who often lack access to dollar accounts, inflation remains an unavoidable tax on their income.
The Federal Reserve’s Global Influence
When the Federal Reserve (Fed) adjusts interest rates, the effects ripple far beyond the US. Higher US interest rates strengthen the dollar, attracting global capital and raising borrowing costs in emerging markets. For Latin American economies, this can mean currency depreciation, increased debt servicing costs, and slower economic growth.
In 2022, for instance, as the Fed raised rates to combat inflation, many Latin American currencies—like the Colombian peso and Chilean peso—lost significant value against the dollar. Governments faced the difficult task of balancing inflation control with the risk of stifling economic recovery.
As the IMF notes, “a stronger dollar tends to tighten global financial conditions,” particularly in countries with high levels of dollar-denominated debt. This dependence illustrates how monetary decisions made in Washington can directly affect public finances in Latin America’s capitals.
Dollar-Denominated Debt and Fiscal Pressure
Many Latin American governments and corporations borrow in dollars because international investors see it as a safer currency. However, this creates a dangerous feedback loop: when the local currency weakens, the real burden of dollar debt increases.
For example, if a company in Argentina issues $100 million in dollar bonds and the peso depreciates by 20%, its debt burden in local terms rises by the same percentage. This exposes entire economies to currency shocks beyond their control.
According to the World Bank, Latin America’s external debt has surpassed $2.5 trillion, much of it denominated in US dollars. This limits fiscal flexibility and makes financial stability heavily dependent on exchange rate management.
Historical Lessons: Crises Fueled by the Dollar
Latin America’s economic history is filled with examples of how the dollar’s dominance can both stabilize and destabilize economies. The region has faced multiple crises in which dollar-denominated obligations and currency mismatches played a central role.
During the 1980s, known as the “Lost Decade,” a combination of high US interest rates and soaring dollar values triggered a wave of debt defaults across Latin America. Countries like Mexico, Brazil, and Argentina were forced into restructuring programs under the guidance of the IMF, leading to years of austerity and social unrest.
More recently, in the early 2000s, Argentina’s attempt to peg its peso to the dollar ended in collapse. The currency board system, designed to stabilize prices by maintaining a fixed one-to-one exchange rate, eventually became unsustainable as the US economy grew stronger and the Argentine economy stagnated. The resulting crisis led to massive devaluation, bank runs, and one of the largest sovereign defaults in history.
These lessons continue to shape the region’s monetary thinking. While dollarization brings temporary relief from inflation, it can also expose economies to external shocks when global conditions shift.
How the Dollar Shapes Inflation and Trade in Latin America
The dollar’s dominance doesn’t just influence exchange rates—it shapes the entire economic landscape of Latin America. From consumer prices to export competitiveness, its shadow looms over every financial decision.
In highly dollarized economies, inflation often mirrors the dollar’s strength. When the dollar appreciates, imported goods become more expensive in local currencies, pushing up prices. Conversely, a weaker dollar can temporarily ease inflationary pressures but may also reduce export revenues.
According to the Inter-American Development Bank (IDB), countries with greater exposure to the US dollar tend to experience higher inflation volatility. This happens because local monetary authorities have limited control when much of the economy operates in a foreign currency.
Trade and the “Dollar Pricing” Effect
Most commodities—such as oil, copper, and agricultural products—are priced in dollars on global markets. This creates a phenomenon known as “dollar pricing,” where local producers and consumers face price fluctuations that have little to do with domestic conditions.
For instance, when the dollar strengthens, the global price of commodities often falls in dollar terms. However, for Latin American countries exporting those commodities, the local value can rise due to exchange rate effects. This complex dynamic affects not only governments’ trade balances but also the daily lives of millions who depend on these industries.
As Bloomberg Economics reported in 2024, a 10% appreciation of the US dollar can reduce export competitiveness in emerging markets by as much as 5%, forcing local firms to absorb losses or cut costs to remain viable.
Strategies for Reducing Dollar Dependence
Latin America’s relationship with the dollar is not a one-way street. In recent years, several countries have sought to strengthen their local currencies, diversify trade partners, and promote financial instruments in domestic denominations.
Some governments are exploring regional settlement systems, such as the Brazil-Argentina initiative to conduct trade in local currencies instead of dollars. Others, like Mexico and Chile, have developed deeper capital markets to encourage investments denominated in pesos.
Central Banks: Balancing Autonomy and Stability
Central banks across the region face a delicate balancing act: maintain exchange rate stability without exhausting foreign reserves. The Central Reserve Bank of Peru (BCRP), for example, frequently intervenes in the forex market to smooth volatility, using its dollar reserves as a buffer.
“Monetary credibility is built over time, not overnight,” says economist María Antonieta Alva, former Minister of Economy and Finance of Peru. “Reducing dollar dependence requires not only policy adjustments but also rebuilding public trust in the local currency.”
This process is gradual. It involves fiscal discipline, consistent inflation targeting, and stronger institutions. Yet, even as countries pursue monetary autonomy, the dollar remains the ultimate reference point for regional stability.
The Future of the Dollar in a Changing World
Could the dollar ever lose its global dominance? It’s a question that economists revisit each decade, especially as new contenders—like China’s yuan or digital currencies—emerge. But for now, the dollar’s position remains virtually unchallenged.
The rise of cryptocurrencies and central bank digital currencies (CBDCs) might diversify global payment systems, but these alternatives have yet to match the dollar’s liquidity, trust, and global reach. According to the Bank for International Settlements (BIS), nearly 90% of all forex transactions in 2025 still involve the US dollar.
Moreover, during crises, global investors still flock to the dollar, reaffirming its role as the world’s safe haven. Even as the economic center of gravity shifts toward Asia, the greenback continues to serve as the backbone of international finance.
Implications for Latin American Investors
For individuals and businesses in Latin America, understanding the dollar’s role is not just academic—it’s strategic. Knowing when to hold assets in dollars, diversify into other currencies, or invest in dollar-linked funds can make the difference between financial stability and vulnerability.
At TodayDollar.com, we encourage investors to think in both local and global terms. The key is not to abandon your currency, but to build a portfolio resilient to dollar fluctuations. Whether through dollar-denominated mutual funds, savings accounts, or diversified ETFs, financial literacy remains your best defense against uncertainty.
Conclusion: A World Still Powered by the Dollar
The US dollar is far more than paper and ink—it’s a symbol of economic confidence, global interdependence, and, for many, a lifeline against instability. In Latin America, its influence is both protective and constraining, shaping policy decisions and personal finances alike.
As the global economy evolves, so too will the dollar’s role. But its current dominance reflects more than just America’s economic might; it represents the world’s collective trust in its value. Understanding this relationship helps individuals and nations alike navigate an uncertain financial future.
Because in today’s world, knowing how the dollar moves isn’t optional—it’s essential.
To learn more about how the dollar, inflation, and global markets shape your daily life, visit TodayDollar.com and explore our latest reports and visual guides.
Frequently Asked Questions (FAQ)
Why is the US dollar considered a safe haven?
Because it’s backed by the world’s largest and most stable economy. The dollar’s liquidity and the strength of US institutions make it the preferred refuge during crises, from wars to recessions.
How does the dollar affect inflation in Latin America?
A stronger dollar raises the cost of imports, leading to higher local prices. When the dollar weakens, inflationary pressure can ease, but export revenues may decline.
What is dollarization, and which countries use it?
Dollarization occurs when a country adopts the US dollar as its official currency. Ecuador, El Salvador, and Panama are fully dollarized economies, while others like Peru have partial dollar use in savings and contracts.
Can Latin America reduce its dependence on the dollar?
Yes, but it’s a slow process. It requires stronger institutions, macroeconomic stability, and local capital market development to rebuild confidence in domestic currencies.
Will digital currencies replace the US dollar?
Not in the near future. While cryptocurrencies and central bank digital currencies are growing, none have achieved the global trust, liquidity, or acceptance of the US dollar.