The U.S. dollar is the most easily recognized, broadly accepted and eagerly desired currency in the world. It is also widely reviled for the power it gives the United States over global affairs.

It is not just U.S. rivals but even the country’s allies that chafe at their reliance on the dollar, with the French usually being the most aggrieved of the lot. French Finance Minister Bruno Le Maire pleaded for other European countries to reduce their reliance on the dollar and added, “I want Europe to be a sovereign continent, not a vassal.”

In a more expansive speech, French President Emmanuel Macron called for Europe to reduce its dependence on the “extra-territoriality of the U.S. dollar,” because otherwise, “if the tensions between the two superpowers heat up … we won’t have the time nor the resources to finance our strategic autonomy and we will become vassals.”

Clearly serfdom is a mortifying prospect. But not just for the French. Brazilian President Luiz Inácio Lula da Silva railed against the dollar in an impassioned speech before a (needless to say) friendly audience in China: “Who was it that decided that the dollar was the currency after the disappearance of the gold standard?”

Perhaps we are on the cusp of change. After all, emerging-market economies are rivaling the economic and military brawn of the advanced economies. One would expect currency power to follow a similar trajectory. And yet, that has not happened. The emergingmarket economies jointly account for roughly one-third of global GDP. Still, currencies like the Indian rupee and the Brazilian real are hardly used outside the countries that issue them.

Even more noteworthy is the concentration of financial power in the hands of one country – the United States. Much of this power comes from the dominance of the dollar in all aspects of international trade and finance, a dominance that has persisted for nearly a century. The U.S. now accounts for only a quarter of global GDP, but the dollar is still by far the leading currency for all aspects of cross-border transactions.

It should not be so. The U.S., after all, sparked the global financial crisis of 2007-9. Its federal government debt is well in excess of a year’s worth of GDP, and the political system is dysfunctional. Most important, the U.S. has wielded dollar dominance as a cudgel against its geopolitical rivals with the threat or actual use of financial sanctions.

By all logic, the dollar should have been knocked off its pedestal. Yet, I will argue, the dollar’s role in international finance is likely to remain far greater than America’s weight in the world economy.

So what if the dollar’s prominence has persisted against all odds? Is that fact of any practical consequence? There are, in fact, symbolic as well as practical reasons why the status of a country’s currency in international markets matters for economic and geopolitical power. Moreover, the imbalance could potentially add a destabilizing element to a world where economic and military prowess are becoming less concentrated. Washington’s willingness to aggressively – and, in the eyes of rivals, recklessly – exploit the dollar’s stature contributes to global financial instability and is fracturing financial markets in a way that deepens geopolitical fissures.

We need to begin, though, with a more rudimentary issue, which is how to evaluate a currency’s relative importance in global financial markets. Then we will review how and why the dollar remains king and explore why that will not change anytime soon. We will see that, while dollar dominance might prove a saving grace at times of crisis, it is that very dominance which has a destabilizing effect worldwide, for it exposes other countries to the mercurial policies of the United States. Although it seems logical that more evenly balanced currency competition would promote stability, that conventional wisdom collapses in the absence of other currencies backed by strong financial markets and institutions. Thus, in a curious twist, the preeminence of the dollar confers upon the U.S. the power to rescue the world when a crisis erupts – but that power has itself become the source of worldwide turbulence.

Currency Dominance

The functions of money are often classified into three categories: as a unit of account for transactions, as a medium of exchange for payments and as a store of value over time. The dollar is by far the dominant currency in all three respects.

Trade between countries is denominated in dollars to a far greater extent than in any other currency. The dollar is the leading payment currency as well: by some measures, roughly half of international payments are settled in dollars. When China imports iron ore and soybeans from Brazil, or Brazil purchases semiconductor devices and telephones from China, most of that trade is invoiced and paid for in dollars rather than in Brazilian reals or RMB.

The dollar is not the only currency that plays a role as a “vehicle currency”; the euro accounts for about one-fifth of international payments. However, once you subtract the share of payments made within the eurozone, the euro’s share becomes smaller, while the dollar’s share is close to 60 percent.

Foreign exchange reserves are typically invested in relatively stable currencies that enjoy worldwide acceptance. Reserves can help ensure a steady stream of imports, even when a country’s domestic currency is falling in value and foreign exporters are loath to accept it as payment. Reserves can also be used to pay back foreign investors, making them less likely to dump their investments.

Foreign exchange reserves must be kept in assets that are perceived as safe and are also liquid. The size and liquidity of U.S. government bond market has for a number of years made the dollar the reserve currency of choice.

The dollar is also a key funding currency in global debt markets. When firms or governments in developing countries borrow in foreign currencies, usually because foreign investors lack confidence in the value of those countries’ domestic currencies, they tend to do so in dollars. About two-thirds of debt securities issued by corporations outside their home countries are in dollars.

These features reinforce each other. Foreign central bank demand for U.S. Treasury securities helps finance U.S. government borrowing. This keeps U.S. interest rates lower than they would otherwise be, making it attractive for foreigners to borrow in dollars. The widespread use of dollars in international trade gives developing countries an incentive to hold reserves in dollars to facilitate a steady stream of imports even when foreign finance dries up.

The Fed’s willingness to support the world’s demand for dollars has bolstered the currency’s prominence. To meet a surge in demand for dollars during the global financial crisis, the Fed gave a select group of major central banks access to dollar swap lines, which meant they could borrow dollars using their own currencies as collateral. Even the Bank of England and the European Central Bank have had to borrow dollars on behalf of their commercial banks and corporations, which had taken out cheap dollar loans and needed dollars to repay them. The extensive use of these swap lines highlights the continued reliance of other reserve-currency economies on dollar funding.

During the Covid-induced global recession, the Fed gave most countries access to dollar financing using their holdings of U.S. Treasury securities as collateral. This canny move allowed the Fed to provide a large group of countries, including those such as India that had previously been unable to secure swap lines, access to dollars at minimal risk to itself. The Fed’s apparent magnanimity gives central banks around the world a stronger incentive to hold their reserves in dollars, pulling them even more firmly into the clutches of the dollar.

We’ve established that the dollar is the dominant international currency. Does this have any practical consequences for the United States and the rest of the world? Dollar dominance confers many advantages on the United States, although there are some costs as well. For the rest of the world, there are mostly only downsides.

The Mixed Blessing

Christmas is an important time of year for retailers in many countries. In the U.S., some retailers earn a disproportionately high share of their annual revenues between Thanksgiving and Christmas. Shopkeepers have to order their wares months in advance, not knowing how strong demand will be or whether their products will be in fashion by the time they hit the shelves. For exporters and importers there is another variable to contend with: the exchange rate of their domestic currency.

Exporters whose revenues are denominated in a foreign currency must convert those revenues to pay workers and suppliers. The exchange rate between the domestic and foreign currencies could change between the time they send an invoice and receive payment. If the domestic currency were to depreciate, they would receive a larger amount of domestic currency than anticipated. But if the domestic currency appreciated, profits might disappear. Importers face similar risk: if a domestic currency depreciated before goods were delivered and payment had to be made, the bill for the goods would be higher.

What if a country’s international trade were invoiced in its own currency, with payments also settled in the currency? That is the lucky circumstance for the U.S.: American importers might not know whether the clothes they stocked for Christmas will be in vogue, but at least they won’t have to worry about the added risk of exchange rate fluctuations.

There are ways to mitigate currency risk – for a price, of course. But U.S. exporters and importers typically don’t have to worry much about this risk or the costs of mitigating it.

A dominant currency is not always a boon, though. Greater demand for a currency usually reflects confidence in a country’s policies and economy, which can drive its exchange rate higher than it would otherwise be. Appreciation usually makes imports cheaper. Dollar appreciation is thus good for American consumers, but makes it harder for domestic manufacturers to compete. By the same token, exchange rate appreciation makes a country’s exports more expensive in foreign markets.

This has led some countries to actively discourage the world from becoming enamored with their currencies. From the late 1960s through the early 1980s, West Germany attempted to restrict purchases of deutsche mark–denominated assets by foreign investors. The Japanese showed a similar reluctance to having the yen regarded as a major global currency.

Despite their efforts, the share of the deutsche mark in global foreign exchange reserves rose from 6 percent in the mid-1970s to 16 percent at the end of the 1980s, while the share of the Japanese yen rose from barely 1 percent to about 8 percent. The shares would likely have risen even further if the countries had welcomed foreign money rather than discouraging it.

A well-regarded currency carries other risks. Over the past five decades, the dollar’s strength has allowed the U.S. to buy more from other countries than it sells to them, with this difference – the trade deficit – being financed by borrowing from the rest of the world. If the United States continues borrowing to finance its purchases, it could become increasingly vulnerable to a shift in sentiment that causes foreign investors to want to switch out of dollar assets.

Falling confidence in the dollar would force the U.S. government to pay higher interest rates on the debt that it issues to finance its budget deficits, soaking up a greater proportion of tax revenues. This could also cause the dollar’s value to plunge relative to other currencies, raising the price of imports.

That this has not happened despite decades of large U.S. trade deficits is surprising. What is even more surprising is that there are several reasons the day when the United States is held to account for its spendthrift ways (if it ever arrives) might be well in the distant future.

Much of the world regards the dollar’s dominance as undesirable, with good reason. The intermediation of so much trade and finance through the dollar leaves other countries, especially smaller and developing ones, at the mercy of the dollar and the whims of U.S. policies.

Fluctuations in the dollar’s value and actions taken by the Fed affect other economies, occasionally in damaging ways. For instance, when the Fed cuts interest rates to prop up the U.S. economy, money often flows out of U.S. financial markets into fast-growing emerging markets in search of better returns, causing their exchange rates to appreciate and hurting their exports. On the flip side, when the dollar appreciates against other currencies, perhaps because the Fed has raised interest rates to control inflation at home, capital tends to flow out of those economies.

To the chagrin of policymakers around the world, the Fed takes account mainly of domestic factors when making its policy decisions. It largely ignores the effects on other countries, as doing so is not part of its official mandate.

The dollar remains by far the world’s deepest and most liquid financing currency, making it easy to raise large amounts of dollar funding relatively cheaply. The temptation of cheap dollar funding has been difficult for foreign governments and corporations to resist. For their part, investors worldwide are usually eager to provide dollar funding because the dollar’s traditional strength and the Fed’s apparent willingness to provide dollars in copious quantities in times of stress reduce the risks of such lending.

But because such lending is carried out in dollars, the risks associated with exchange rate fluctuations fall entirely on the borrowing corporations and countries. Thus, while the dollar’s prominence is hardly the root cause of indebtedness, it often leads to debt distress for poor countries.

All things considered, the world seems eager to reduce its dependence on the dollar. Even most Americans might view its dominance as a mixed blessing. So why hasn’t the dollar tumbled from its exalted perch?

The Perplexing Persistence of Dollar Dominance

The value of a currency depends on the confidence people place in it. Yet the present state of the U.S. economy, banking system and policymaking process hardly inspires confidence.

One of the greatest concerns over the dollar’s prospects is the sheer level of U.S. government debt. Gross federal public debt at the end of 2024 stood at $36 trillion, roughly 125 percent of annual GDP. Still, Washington seems reluctant to address the annual deficits that continue to add to the debt.

Perhaps the dollar’s special status means that the usual constraints do not apply. Advocates of the so-called modern monetary theory (MMT) have argued that the United States should take full advantage of the singular power it has to print money to finance government expenditures. This proposition is as tempting as it is dangerous because it risks legitimizing ever-rising budget deficits.

For all the opprobrium from economists – MMT is neither modern nor a theory, let alone a coherent monetary theory – it is striking that the United States has, in effect, followed this approach for many decades. This hardly means the U.S. economy is exempt from the basic laws of economics – the surge in government expenditures and corresponding deficits in response to the pandemic-induced recession did contribute to a spike in inflation in 2022 – but it is clearly on a much longer leash than other economies.

Ratings agencies pass judgment on the relative safety of debt securities based on a variety of financial indicators. Government securities are typically considered safer than those issued by corporations, although the bonds issued by some countries, including Argentina, Bolivia, Mozambique and Pakistan, to name a few, are certainly worthy of junk status – meaning they are highly likely to default.

In August 2011, one of the three major global rating agencies, Standard and Poor’s, reduced the U.S. government’s credit rating by a notch, from AAA to AA+, marking the first time the world’s safest issuer of debt was downgraded. This was a stunning move, for the very prospect of a default on U.S. government debt had long been considered unthinkable. In short, a U.S. government debt default would be a cataclysmic event with unpredictable but probably dramatic fallout for U.S. and global financial markets.

Such a scenario became no longer unthinkable, however, because the Republican Party realized the threat of forcing a default would provide leverage in negotiations to advance their policy priorities. After all, faced with this threat, the Democrats would surely cave in to Republican demands for fear of otherwise setting off turmoil in U.S. financial markets. Inconceivable as it might seem that politicians would want to turn confidence in U.S. government debt into a bargaining chip, that is now the reality.

So far, the prospect of havoc has prompted the U.S. to pull back from the brink each time. But the risk that a small group of politicians might decide that these consequences have been overstated, coupled with the ever-rising debt, has led to further downgrades. In August 2023, another major rating agency, Fitch, downgraded the U.S. government’s long-term debt rating from AAA to AA+.

It is extraordinary for what is widely perceived as the safest asset in the world to be rated as less than perfectly safe. What is even more extraordinary is the effect the downgrades have had.

Usually, a downgrade prompts investors to unload the security. A downgrade of a government’s debt would thus raise the cost of financing its deficits and worsening its fiscal position. The country’s currency also usually takes a beating when this happens. This is why governments (and corporations) fear the effects of downgrades.

So what happened to U.S. interest rates after the downgrades? And what of the U.S. dollar? In a word, nothing: the dollar strengthened against most currencies.

One could argue that this was because the downgrades simply ratified what financial market participants had already priced in. Nonetheless, it is remarkable that, unlike any other country, the United States can brush off downgrades with barely any consequence.

While the U.S. has repeatedly pulled back from the edge, it is hard to imagine that such near-doomsdays won’t eventually erode confidence in the economy, financial system and currency. Each downgrade conveys little new information, but still reinforces the perception that the dollar’s dominance rests on a fragile foundation. Indeed, when Moody’s, the third major rating agency, lowered the U.S. government’s credit rating in May 2025, long-term interest rates rose and the dollar fell, albeit only moderately and briefly.

Central bank independence is one of the key pillars underpinning a trusted currency. Because central banks are led by unelected technocrats whose decisions affect the economic well-being of a country’s citizens, it is a fair question why elected representatives shouldn’t have more direct influence over monetary policy. It has come to be widely recognized, though, that leaving a central bank alone renders it most effective. Otherwise, merely the prospect that a central bank could have its arm twisted to print money as a means of funding government deficits can lead to galloping inflation.

Another pillar supporting a global currency is the rule of law, which is especially important for investors. They need confidence that a country’s laws will be interpreted consistently and fairly, and that the government will abide by the laws once it has created them. A third pillar is a set of robust checks and balances to ensure that no arm of government can undertake policies that are destructive to a country’s interests.

All the traditional reserve-currency economies (including the eurozone, Japan and the United Kingdom) boast such an institutional framework. In the United States, though, each of these pillars came under attack during the first Trump administration. Unhappy with the Fed’s policy decisions on interest rates, Trump excoriated the institution as “pathetic,” filled with “boneheads,” and an “enemy” of the country.

His nominees for the Fed’s board of governors included a political hack or two and economists who favored gutting the Fed’s regulation of banks. One nominee, Judy Shelton, was a longtime Fed critic who had advocated for reverting to the failed experiment of tying the dollar’s value to the price of gold. Her nomination missed Senate approval by the narrowest of margins, with two Republican senators unable to vote because they were quarantining after being exposed to Covid-19.

Thus did the guarantor of the dollar’s stable value, the Fed, come to have its independence and credibility threatened by the president of the United States. Not only was the central bank’s independence threatened, but a president willing to openly flout laws exposed the limits of the judicial system. And Congress proved unwilling to challenge even Trump’s most egregious behavior.

These patterns were reinforced in Trump’s second term. Trump has made it clear that his selection of appointees to the Fed’s board will put more weight on personal loyalty to him and his policies than on technical competence. Moreover, his administration has undercut the rule of law and further enervated checks and balances.

The apparent shakiness of the American institutional framework should, by all logic, cause the pedestal on which the U.S. dollar has long perched to wobble. But it is not just Republican administrations and weaker domestic institutions that ought to be contributing to such wobbling. Technology could play a role, too.

The dollar’s role as an international payment currency is likely to be affected by new payment systems. One prominent example is China’s Cross-Border Interbank Payment System (CIPS), which enables direct links with other countries’ payment systems. India, Russia and other emerging-market countries are developing their own payment systems that can be connected to CIPS. China and India, for instance, will no longer need to exchange their respective currencies for U.S. dollars to conduct trade.

Such developments could eventually chip away at the dollar’s dominance. At the same time, these changes could undermine the roles of other international currencies, such as the euro and the yen, thus weakening the dollar’s closest rivals even further.

The United States has wielded the dollar’s dominance as a powerful geopolitical tool, often by imposing financial sanctions on its adversaries. The dollar-centric global financial system gives U.S. sanctions particular bite because they affect any country or firm that has dealings with a U.S.-based bank or even a secondary relationship with such institutions. This situation also entangles countries that may not agree with U.S. policies but are forced to follow its lead for fear that their own banks could be cut off from dollar transactions.

In addition to the denomination and settlement of a majority of cross-border transactions in dollars, there is another choke-point in the international financial system. The messaging system that connects commercial banks in different countries, enabling global payments, is managed by SWIFT (the Society for Worldwide Interbank Financial Telecommunication).

Headquartered in Belgium and owned by the banks that use its services, SWIFT is in principle nonpartisan and apolitical. But with U.S. banks playing a major role in global finance, the organization is vulnerable to American pressure, especially when other Western economies join in.

This can result in specific institutions being cut off from the messaging system, and when applied broadly, it can cripple an entire country’s access to international finance. The U.S. Treasury has deployed these tools in sanctions imposed on the central banks and political figures of many nations it considers rogue, including Iran, North Korea, Syria and Venezuela.

Russia’s annexation of Crimea in 2014, followed by its invasion of Ukraine in 2022, have made it the most significant target of financial sanctions imposed by the United States and its Western allies. Russia was cut off from the international payment system when most of its major banks lost access to SWIFT. Selective sanctions were also imposed on a few individuals and firms in other countries, including China, Türkiye and the UAE, that were deemed to have helped Russia evade payment restrictions.

Sanctions had in the past affected mainly cross-border payments. But now even foreign exchange reserves have become targets. Thanks to its massive oil export revenues, in the early 2000s Russia had accumulated a war chest of foreign exchange mostly in dollars, euros, pounds sterling, and RMB – precisely to protect the ruble’s value during economic or geopolitical turmoil. The freezing of the Russian central bank’s accounts in Western financial capitals in response to Russia’s invasion of Ukraine effectively sealed a big portion of this war chest.

China certainly helped soften the blow by offering various forms of financial support. But the support was in the form of RMB. Because the RMB is not yet a fully convertible currency, which means the Chinese government restricts how much of it is available and how freely it can be transacted outside the country, its use in global markets is inherently limited. While it might help Russia evade sanctions, China’s relatively modest footprint in global financial markets and the vulnerability of Chinese firms and financial institutions to secondary sanctions limit the viability of this escape route.

Russia, China, and other U.S. rivals are certainly motivated to reduce their dependence on the dollar-centric financial system. China’s CIPS already has messaging capabilities that could sideline SWIFT. The dollar-dominated global financial system and American influence over SWIFT have long given U.S. financial sanctions substantial traction. The efficacy of such sanctions will inevitably erode over time.

Restrictions on transactions involving Russia’s central bank could just as easily be applied against other countries. This should encourage not just Russia but other countries, particularly U.S. rivals, to shift their reserves out of dollars and into the currencies of friendlier countries like China. But, as Russia has discovered, the limited worldwide acceptability of RMB-denominated reserves means that, at crunch time, they are of limited help in preventing the collapse of its own currency. Still, the restrictions on Russia’s access to the Western-dominated global financial system will undoubtedly drive it into a deeper economic embrace with China.

Even if the United States were a paragon of sound macroeconomic policies, well-functioning government and robust institutions, the dollar ought to become less dominant over time. Financial markets, including in some emerging-market economies, are becoming more developed, creating a broader pool of assets for central banks to use in parking their reserves. From a diversification perspective, it makes little sense for any central bank to hold more than half its portfolio in a single asset or currency. The high degree of concentration in dollar-denominated reserves – the equivalent of an investor’s devoting more than half their portfolio to one company’s shares – is risky. When it comes to reserves, the risk is both economic and geopolitical, as we saw in the case of Russia.

Emerging-market central banks hold nearly $6 trillion in foreign exchange reserves (as of late 2024), with China accounting for about half. Managers of those reserve funds, particularly China’s central bank, are certainly eager to diversify away from countries and currencies perceived as being on the other side of deepening geopolitical fissures. The difficult reality reserve managers face, however, is that the supply of financial assets that are easy to buy and sell cheaply and in large quantities (and are backed up by strong central banks and regulatory frameworks) primarily comes from large, advanced economies. And even in this small group, the U.S. dollar continues to stand above the rest.

In a world where logic held greater sway, concerns about the dollar’s safety, stability and long-term value would increase borrowing costs for the U.S. government and make it harder to finance large budget and trade deficits. Many of the problems discussed earlier mean that the United States is in fact increasing its share of the supply of “safe assets,” which investors around the world are happy to lap up. In yet another irony, it is precisely U.S. fiscal recklessness that enables its bond markets to tower over the rest, with the market value of outstanding U.S. government bonds exceeding those of the eurozone, Japan and the UK combined. China’s government bond market is large, but its bonds lack some key characteristics – such as easy access and tradability for foreign investors – that are typical of those in advanced economies.

Still, this picture seems discordant. American politics and policies are undercutting the foundations of the dollar. Moreover, there is clear enthusiasm for ending its dominance. In the international marketplace, only a handful of major currencies still matter. So why haven’t any of them assumed the mantle?

Feeble Alternatives

After its creation in 1999, the euro was seen as the main rival to the dollar. The euro area’s GDP matched that of the United States, and its financial markets and institutions were seen as robust. Within a few years of its creation, the euro’s share of global foreign exchange reserve holdings had risen by about 7 percentage points, the dollar’s share had fallen by a corresponding amount, and the writing seemed to be on the wall. But as with many projections of present trends into the future, the prognostications proved wildly off the mark.

The euro’s share of global foreign exchange reserves reached 28 percent in 2009. But the global financial crisis, followed by the eurozone debt crisis, put paid to the euro’s rise. It became apparent that the zone’s financial markets were not fully unified, creating hindrances even to moving money across banks within the zone.

The United States, by contrast, has one financial system, making it much easier to conduct dollar-based transactions. Moreover, the supply of eurozone government bonds that could be considered safe assets is smaller than suggested by the overall size of the government bond markets of the member countries. The illusion that a Greek or Italian government bond carries the same level of risk as a German government bond is no longer tenable. The eurozone continues to be riven by economic malaise and political dissension, with centrifugal forces constantly straining its unifying fabric. So the euro’s prospects as a serious rival to the dollar have faded.

Surely the second-largest economy in the world should have a currency that matches its heft on the global stage. Spurred by this ambition, in 2010 the Chinese government and central bank initiated a project to promote the “internationalization” of the RMB. The government committed to reducing restrictions on financial flows into and out of the country, limiting its control of the RMB’s exchange rate relative to the dollar, and giving foreign investors easier access to China’s equity and bond markets.

These promises paid off. In October 2015, IMF officially designated the RMB an elite reserve currency by announcing that, within one year, it would be included in the small “basket” of currencies that determine the value of the IMF’s own currency unit, the special drawing right. The SDR is a composite currency created out of thin air by the IMF and distributed to all its member countries. From 1999 to 2015, the SDR basket included the dollar, euro, Japanese yen and British pound sterling. The RMB’s addition was symbolically momentous both for China and the international financial system, the first time an emerging-market currency was put on par with major advanced-economy currencies.

Meanwhile, China’s central bank, the People’s Bank of China, signed agreements with a number of central banks providing them with easy access to each other’s currencies – much like the Fed’s currency swap arrangements. The Fed limits its arrangements to a handful of select central banks. But the People’s Bank of China was far more inclusive, signing agreements with more than 30 counterparts including the central banks of many developing countries. The point was to encourage those central banks to view the RMB as a viable international currency that would be readily available to them to borrow in time of need.

From 2010 to 2015, the RMB indeed made significant progress to becoming an international currency. It went from accounting for virtually no cross-border payments to being used in nearly 3 percent of such payments. Even this modest share meant the RMB had become the fourth or fifth most important payment currency in a remarkably short period. Predictions placing the RMB on an unstoppable path to shattering the dollar’s dominance began bubbling up.

Then reality hit. In August 2015, the People’s Bank of China set off turmoil in currency markets by devaluing the RMB by about 2 percent relative to the dollar, a move meant to support the country’s exports.

The timing was particularly inopportune as the Chinese economy was stalling and the government was in the midst of an anticorruption campaign. With wealthy Chinese worried about the safety of their fortunes and with foreign investors souring on the country’s stock markets, money fled the country. The government curbed capital outflows and still ended up spending about a trillion dollars of its foreign exchange reserves (which, at their peak, amounted to $4 trillion) to support the RMB and prevent it from collapsing in value against the dollar.

These events reflected China’s violations of its commitments to reduce restrictions on cross-border financial flows and to allow market forces to determine the exchange rate of the RMB. Despite this turmoil, the IMF went ahead with its decision to include the RMB in the SDR basket. But the rise of the RMB had fizzled by then, and the illusion that it was one of the elite global currencies had been shattered.

The RMB is still likely to make further progress as an invoicing and payment currency reflecting China’s large role in global goods trade. Access to RMB is useful for countries that have formed strong trade and financial linkages with China, and such access could become increasingly attractive as the RMB gradually rises in stature. The RMB’s share in emerging-market economies’ reserve holdings will grow driven by efforts to diversify those holdings and by geopolitical tensions, although this increase will be constrained by China’s capital controls and weak institutional framework.

But the RMB will not become a significant reserve currency until China allows its financial markets to develop more freely and subjects those markets to effective regulations that enable foreign investors to easily trade high-quality RMB-denominated assets. The currency’s role in global finance will thus ultimately be determined by the degree of commitment on the part of Xi Jinping’s government to economic and financial market reforms.

Barry Eichengreen of the University of California has highlighted the rise during the 2010s and early 2020s in the shares of smaller currencies in foreign exchange reserve portfolios. Collectively, their share in global reserve portfolios was about 11 percent in 2025 compared with 2 percent in 2000. The Australian and Canadian dollars, the leaders of this motley pack, each now accounts for 2-3 percent of global payments and reserves.

None of these currencies amounts to much by itself, though, and the increase in their collective shares merely points to a desperate worldwide desire for currency diversification. Ironically, while the U.S. dollar’s position as the dominant international currency may erode modestly as part of this realignment, the larger effects appear to be on the second-tier currencies such as the yen and the pound sterling. The importance of these once-powerful currencies has declined in recent years, both in payments and in foreign exchange reserves.

Occasional proposals to combine the financial firepower of multiple countries to create a stronger currency are attractive but ultimately unrealistic. China, Brazil and Russia – three of the five countries that comprise the BRICS group – would dearly love to disengage from the U.S. dollar. Even India and South Africa, the other two in the group, would no doubt prefer a world in which they are less vulnerable to the whimsies of Fed policies. So this group has talked up the possibility of creating a common currency, based on the notion that their collective economic might and prominence in trade should give such a currency immediate traction if they agreed to use it among themselves.

Questions about who would issue and manage the currency might prove too challenging, though, for a group with some common aims but little mutual trust. A BRICS currency will, in any event, remain a mirage until the countries involved can strengthen their financial markets and regulatory structures, and, most importantly, enhance their institutional frameworks.

Gold has long been an alluring asset. Its limited supply has resulted in an article of faith among many investors and even some central banks that it will hold its value well over the longer term. Gold has certainly been around as a store of value for centuries if not millennia, far predating any of the official currencies issued by a national central bank now in circulation.

Similarly, the cryptocurrency bitcoin is scarce in supply, and proponents view that as the underpinning of its value as a financial asset. A specific number of bitcoins is created roughly every 10 minutes, and this number is programmed to decline over time, ultimately capping the number of bitcoins at 21 million. Bitcoin has no intrinsic worth, as it has not proven to be a trusted medium of exchange for transactions because of its volatile value. Nevertheless, this original cryptocurrency has become what it was never intended to be – a financial asset.

Neither gold nor bitcoin is a viable alternative to the dollar as a payment or invoicing currency due to their unstable values and limited supply. Their suitability as reserve assets is constrained by these same limitations, as well as their lack of liquidity. Imagine what would happen if a central bank tried to sell tens of billions of dollars’ worth of gold or bitcoin in a short period. Prices would tank, and the seller would soon be selling into a sinking market.

Perhaps one way to keep the dollar central to global finance while erasing some of the undesirable side effects of its dominance is to link its value to gold. The idea of backing dollars with something that is scarce and whose supply cannot easily be expanded seems appealing. Pinning its value to what is in effect a purely speculative financial asset, however, is hardly a sensible path to monetary and financial stability.

There is a good reason why the backing of the dollar and other currencies by gold was abandoned many decades ago: it severely constrains monetary policy and restricts exchange rate fluctuations, depriving countries of tools to stabilize their economies in response to changing circumstances. Adherence to the gold standard contributed to the Great Depression of the 1930s by limiting the increase of money supply that could have stimulated growth. Reverting to a gold standard remains a misguided and dangerous idea in the worlds of modern money and finance, where such constraints could severely limit central banks’ capacity to guide economic activity and maintain financial stability by using interest rates to influence credit creation.

Hope springs eternal, and some of those eager for a switch out of the dollar have pinned theirs on the IMF’s Special Drawing Rights. The IMF itself emphasizes that the SDR is not a typical currency, however. It cannot be used directly in private transactions. The IMF describes the SDR as “a potential claim on the freely usable currencies of IMF members.”

In simpler terms, SDRs can be used as collateral by national governments to borrow real money, such as dollars and euros, that they can use to purchase imports or pay off creditors. Inasmuch as the IMF is a trusted institution and can create as many SDRs as its members will allow it to, this seems a simple solution for a globally accepted currency to supplant the dollar. The IMF would just credit countries’ accounts at the institution with newly minted SDRs.

In fact, emerging-market policymakers are wary that IMF money might come with strings such as requiring them to undertake painful economic reforms or agree to meet labor and environmental standards. Moreover, with voting power at the institution largely in the hands of Western economies, countries on the other side of the geopolitical divide can hardly count on unfettered access to money from the IMF, even if it sits in their own accounts at the institution.

There are also economic reasons why the IMF cannot supply large quantities of SDRs without affecting their relative value. Every central bank is protected by the taxing authority of the national government behind it. That authority takes the form of the government’s insistence that tax obligations be paid using only money issued by the country’s central bank.

This requirement generally helps protect the relevance and value of central bank money unless the government runs large budget deficits. The IMF has no such backing; it relies on the goodwill of its member countries to provide their currencies in exchange for SDRs when needed. And the system of checks and balances that anchor the values of major national currencies is absent, so the SDR could face a crisis of trust during difficult times. Thus, for all its virtues, the SDR is not destined to become a rival to the dollar.

Why The Dollar Will Remain Dominant

It is becoming ever harder to view the United States as a well-functioning, dynamic economy with a deep and sound financial system backed by a robust policymaking process with checks and balances. For all the country’s strengths, its economic and financial woes will ultimately take a toll on U.S. economic and geopolitical leadership. Still, the absence of any viable alternatives to the dollar will put off its day of reckoning well into the future. In fact – and much to the world’s consternation – many forces are driving increasing concentration of the dollar’s power and growing fragmentation in the power of other currencies.

This currency bipolarity, with one dominant renegade currency on one side and a plethora of other currencies with their own shortcomings on the other, seems a recipe for instability. Could change be imminent?

Dollar doomsayers invariably point to how quickly the dollar replaced the pound sterling as the dominant reserve currency after World War II. The implication is that this could just as easily happen to the dollar. But times are different. The United States has no serious rival that can match its combined economic and financial market size. And although its institutions have frayed, those of other major economies are in worse shape.

There are other quirks that make any drastic change unlikely. In the early 2000s, expectations were rampant that the rest of the world would tire of lending to the United States and that the dollar would collapse. Curiously, the turmoil unleashed by the global financial crisis instead led central banks and other investors to seek safety in the dollar, the currency of the very country that precipitated the crisis!

Foreign investors hold far more value in U.S. financial assets than American investors hold in the rest of the world. By 2014, U.S. foreign liabilities were $32 trillion and U.S. foreign assets amounted to $25 trillion, rendering the United States a net debtor to the tune of $7 trillion. In theory, this should have given the rest of the world power over the dollar: If foreign central banks and other investors had pulled money out of the dollar, the currency would have collapsed.

In my 2014 book, The Dollar Trap, I highlighted one crucial point: U.S. liabilities to the rest of the world are denominated in dollars, while its assets are denominated mostly in foreign currencies. So what would happen if the world turned away from the dollar, sending its value plummeting?

From the U.S. perspective, the value of U.S. liabilities to foreigners would not be affected; they would still be worth the same number of dollars (and of course it is the Fed that prints those dollars, making it even easier to repay dollar debts). But U.S.-owned foreign assets would now have a higher value in dollars because each unit of foreign currency would be worth more dollars.

So, in effect, a plunge in the value of the dollar would be a huge financial gift from the rest of the world to the United States!

Recognizing the perilous position they have put themselves in, other countries should have reduced their exposure to the dollar trap. Quite the opposite has happened. By the end of 2024, America’s foreign liabilities and assets were $62 trillion and $36 trillion, respectively, almost quadrupling the U.S. net debtor position over the preceding decade. The United States now has the rest of the world in an even tighter chokehold!

This outcome is as clear an indication as any of one of the most remarkable enigmas in international finance. Despite everything the United States has done that should have driven the world away from the dollar, it remains far and away the dominant economic and financial power.

Rickety Currency Configurations

While the dollar still reigns supreme, changes are afoot that should, in a more rational world, threaten its dominance. Competition between purveyors of once-prominent currencies seeking to maintain their relevance and upstart currencies establishing footholds, at least as regionally important currencies, could fragment the global monetary system. China, India and many other emergingmarket countries are encouraging their neighbors and trading partners to use their currencies. The ensuing competition between currencies that are not anchored by strong economies and financial systems has the potential to hinder cross-border transactions and destabilize capital flows because such currencies are vulnerable to sharp swings in confidence.

Now, the world is tiring of U.S. economic and political dysfunctionality, financial fragilities and heavy-handed global engagement. The prospect of the dollar’s meeting its comeuppance from some quarter or another is tantalizing for those who despise the power the currency’s dominance confers on the United States. But if the dollar was knocked off its pedestal, that might still be cause for worry.

Consider a reprise of the 2008 global financial crisis. In that moment of great peril, the dominance of the dollar and the willingness of the Fed to provide essentially unlimited quantities of funding to financial markets kept a bad situation from worsening. Even other major central banks relied on access to dollars to stabilize their own financial systems. The fact that there was one reliable, widely known and easily available currency, and that it was issued by a central bank that was trusted the world over, meant the world could coordinate its faith in one currency.

In the Trump era, the Fed may struggle to help other countries avert financial catastrophe, as such actions might not align with Trump’s narrowly defined view of America’s interests. Yet the situation could be even more dire if the dollar were to lose its primacy.

If financial markets were melting down, investors who were trying to figure out which currency was the safest could add volatility, especially when timely and reliable information was difficult to come by. Sharp swings of investor funds into and out of various currencies would become more likely, and therefore more destabilizing. In short, a world marked by fiercer currency competition might be stable in normal times. But fragility would arise during financial panics, as investors switched between currencies without a single anchor to tie themselves to.

This is hardly an uplifting story of American exceptionalism; rather it is a melancholy one of frailties in the rest of the world that allow the United States currency to tower over others despite its propensity to create financial havoc in far-flung corners of the world.

To reduce dollar dominance, other countries would have to further develop their financial markets, improve their monetary and fiscal policies, and strengthen their institutions. That is a tall order, especially in countries beset by other problems such as shrinking labor forces, unstable politics and government policies that sap economic dynamism. Given this state of affairs, the end of dollar dominance would be destabilizing as well, just in a different way and under different circumstances.

All told, the dollar’s preeminence spells destabilization from every angle, exposing other countries to turbulence but simultaneously stoking fear that moving away from the dollar, especially if it were to happen abruptly, could unleash far greater turmoil. A true doom loop if ever there was one.