<h2><strong>Executive Summary</strong> </h2><ul><li><p>The dollar <strong>centrality to global trade and finance</strong> comes from America’s economic heft, deep financial markets, credible institutions and long-standing security alliances.</p></li><li><p>Persistent deficits, opaque financial exposures, pressure on Federal Reserve independence, expanding tariffs, sanctions and fraying alliances will <strong>weaken support for the dollar</strong>.</p></li><li><p>Gold, the euro and renminbi can <strong>absorb some diversification</strong> but volatility, limited safe assets and restricted market access prevent any of them from replacing the dollar at scale.</p></li><li><p>Central banks are moving into <strong>smaller reserve currencies and regional digital-payment networks</strong> are emerging along geopolitical lines.</p></li><li><p>A <strong>gradual transition</strong> could make the global monetary system more resilient, but an abrupt shift would threaten liquidity and trade finance.</p></li></ul>.<p>Global finance runs primarily through the dollar, which anchors trade, banking, foreign exchange and official reserves. Yet the system is slowly diversifying as confidence in US fiscal, institutional and geopolitical stewardship comes under greater strain. Professor Barry Eichengreen examined why international currencies rise and endure, which alternatives could gain ground and how a poorly managed transition away from the dollar could threaten global liquidity.</p>.<h2><strong>Why the Dollar Still Dominates</strong></h2><p>The dollar sits on one side of about 90% of foreign-exchange transactions and accounts for 57% of official reserves. Its position stems from the scale of the US economy and the depth and liquidity of the Treasury market. Having established itself as the dominant currency for global trade and investment, convenience has helped preserve its dominance. This has allowed US companies to conduct cross-border business in their own currency and the federal government to borrow at a lower 'convenience yield'. Safe-haven flows also provide insurance during crises, while the centrality of dollar clearing makes US sanctions unusually powerful.</p><p>History suggests that economic weight alone is insufficient. International currencies have generally belonged to states with credible institutions, checks on arbitrary action and protection for creditors. They have also rested on geopolitical relationships. West Germany and Japan supported the dollar partly on account of US security guarantees, while Saudi Arabia recycled oil earnings into dollar assets alongside American security support. Monetary influence draws strength from rule of law and durable alliances as much as from trade and financial markets.</p>.<h2><strong>Dollar Dominance Under Strain…</strong></h2><p>The dollar’s share of global reserves has fallen from slightly above 70% at the start of the century to below 60% today. Foreign investors, who held a majority of US Treasuries a decade ago, now own less than half. The borrowing advantage attached to Treasury securities has also narrowed as investors demand greater compensation for risk. The dollar’s future position will depend on how the US manages key domestic and geopolitical vulnerabilities:</p><ul><li><p><strong>Persistent fiscal deficits: </strong>The US is running budget deficits of ~6% of GDP year-on-year. Federal debt has reached $40 tn, while public debt exceeds 100% of GDP and is projected to rise sharply under the current administration. As borrowing requirements grow, investors may demand higher returns to hold US government debt, eroding the financial advantage that has helped sustain the dollar’s global appeal.</p></li><li><p><strong>Opaque financial-market exposure: </strong>The post-2008 regulatory framework is being loosened at a time when financing for AI and data-centre investments is spread across banks, private-credit firms, special-purpose vehicles and affiliated insurers. These exposures are difficult to trace, making it unclear where financial stress might emerge. </p></li><li><p><strong>Pressure on Federal Reserve independence: </strong>Attempts to force interest rates down or monetise public debt could debase the dollar, and investors may begin pricing in that risk before it materialises. </p></li><li><p><strong>Rising protectionism: </strong> Higher tariffs reduce US trade and weaken its standing as a reliable trading partner, giving other countries fewer reasons to use and hold dollars.</p></li><li><p><strong>Expanding use of sanctions: </strong>The number of individuals, companies, banks and governments under US sanctions has increased 10x since 2000. Even entities facing only a remote sanctions risk now have an incentive to develop alternative reserve assets and payment channels.</p></li><li><p><strong>Weakening alliances: </strong>The dollar has historically benefited from US security relationships. Doubts about US commitments to NATO partners and its defence treaty with South Korea could reduce US allies’ willingness to hold a disproportionate share of their reserves or conduct their cross-border business in dollars. A breakdown in these longstanding bargains poses the greatest risk to the currency’s international position.</p></li></ul>.<h2><strong>…With No Credible Alternatives</strong></h2><p>Gold has regained its importance among emerging-market central banks since the Global Financial Crisis. It offers diversification and protection from foreign asset freezes. However, its role in international finance may remail limited given its volatile price, inability to earn interest and inconvenience as a form of payment. Meanwhile, the Euro is constrained by the shortage of safe, liquid public assets. Euro-zone governments with the strongest ratings have only issued bonds worth around 4 tn euros, compared with roughly $40 tn of US federal debt, with much of this supply locked within national banking and insurance systems. Fragmented capital markets and the absence of common fiscal, defence and foreign policies further limit the currency's reach.</p><p>Despite China being the world’s largest trading nation, the renminbi represents barely 2% of global reserves. The internationalisation of the currency only began 10-15 years ago, and Chinese financial markets remain partly closed and slower economic growth will delay cross-border activity expansion. The renminbi can gain share but catching up with the dollar will take much longer than early projections assumed.</p>.<h2><strong>Diversification Will Develop at the Edges</strong></h2><p>Many central banks are reducing their dollar exposures but have done this mainly by moving into smaller currencies rather than the euro or renminbi. The Australian dollar, South Korean won, Singaporean dollar and Norwegian krone have become easier and cheaper to trade as electronic platforms narrow bid-ask spreads. Their appeal also reflects the credibility of small, open and generally inflation-targeting economies. India's limited presence in this group is partly explained by capital markets that are not fully open to foreign investors.</p><p>Digital infrastructure could allow countries to settle cross-border payments without using the dollar. Project mBridge, linking China, Hong Kong, Thailand, the UAE and Saudi Arabia, has processed actual transactions, including some oil trade settled in Renminbi. However, its roughly 4,000 transactions worth $55 bn over 3 years pales relative to the sheer volume of daily dollar clearing. Scaling is a political challenge as members must decide who can join, how the platform will be regulated and how voting power will be distributed. A China-led mBridge and a Western-aligned Project Agora point towards regional networks shaped by geopolitical blocs rather than one global payments platform.</p>.<h2><strong>The Risks Depend on the Pace of Transition</strong></h2><p>A gradual transition would allow the euro, renminbi, gold and smaller reserve currencies to expand their influence while the global system adjusts. Lower dependence on a single currency could make the system more resilient without disrupting trade and finance. An abrupt loss of confidence among private investors and official reserve holders would be far more dangerous. If they moved away from the dollar before alternatives developed sufficient scale, the world could face a liquidity shortage. In the 1930s, sterling’s devaluation and three major US banking crises weakened confidence in both leading reserve currencies. Foreign credit and trade finance became scarcer and more expensive, contributing to the collapse of global trade. An abrupt transition could reduce global liquidity and make foreign credit and trade finance scarcer and more expensive.</p>
<h2><strong>Executive Summary</strong> </h2><ul><li><p>The dollar <strong>centrality to global trade and finance</strong> comes from America’s economic heft, deep financial markets, credible institutions and long-standing security alliances.</p></li><li><p>Persistent deficits, opaque financial exposures, pressure on Federal Reserve independence, expanding tariffs, sanctions and fraying alliances will <strong>weaken support for the dollar</strong>.</p></li><li><p>Gold, the euro and renminbi can <strong>absorb some diversification</strong> but volatility, limited safe assets and restricted market access prevent any of them from replacing the dollar at scale.</p></li><li><p>Central banks are moving into <strong>smaller reserve currencies and regional digital-payment networks</strong> are emerging along geopolitical lines.</p></li><li><p>A <strong>gradual transition</strong> could make the global monetary system more resilient, but an abrupt shift would threaten liquidity and trade finance.</p></li></ul>.<p>Global finance runs primarily through the dollar, which anchors trade, banking, foreign exchange and official reserves. Yet the system is slowly diversifying as confidence in US fiscal, institutional and geopolitical stewardship comes under greater strain. Professor Barry Eichengreen examined why international currencies rise and endure, which alternatives could gain ground and how a poorly managed transition away from the dollar could threaten global liquidity.</p>.<h2><strong>Why the Dollar Still Dominates</strong></h2><p>The dollar sits on one side of about 90% of foreign-exchange transactions and accounts for 57% of official reserves. Its position stems from the scale of the US economy and the depth and liquidity of the Treasury market. Having established itself as the dominant currency for global trade and investment, convenience has helped preserve its dominance. This has allowed US companies to conduct cross-border business in their own currency and the federal government to borrow at a lower 'convenience yield'. Safe-haven flows also provide insurance during crises, while the centrality of dollar clearing makes US sanctions unusually powerful.</p><p>History suggests that economic weight alone is insufficient. International currencies have generally belonged to states with credible institutions, checks on arbitrary action and protection for creditors. They have also rested on geopolitical relationships. West Germany and Japan supported the dollar partly on account of US security guarantees, while Saudi Arabia recycled oil earnings into dollar assets alongside American security support. Monetary influence draws strength from rule of law and durable alliances as much as from trade and financial markets.</p>.<h2><strong>Dollar Dominance Under Strain…</strong></h2><p>The dollar’s share of global reserves has fallen from slightly above 70% at the start of the century to below 60% today. Foreign investors, who held a majority of US Treasuries a decade ago, now own less than half. The borrowing advantage attached to Treasury securities has also narrowed as investors demand greater compensation for risk. The dollar’s future position will depend on how the US manages key domestic and geopolitical vulnerabilities:</p><ul><li><p><strong>Persistent fiscal deficits: </strong>The US is running budget deficits of ~6% of GDP year-on-year. Federal debt has reached $40 tn, while public debt exceeds 100% of GDP and is projected to rise sharply under the current administration. As borrowing requirements grow, investors may demand higher returns to hold US government debt, eroding the financial advantage that has helped sustain the dollar’s global appeal.</p></li><li><p><strong>Opaque financial-market exposure: </strong>The post-2008 regulatory framework is being loosened at a time when financing for AI and data-centre investments is spread across banks, private-credit firms, special-purpose vehicles and affiliated insurers. These exposures are difficult to trace, making it unclear where financial stress might emerge. </p></li><li><p><strong>Pressure on Federal Reserve independence: </strong>Attempts to force interest rates down or monetise public debt could debase the dollar, and investors may begin pricing in that risk before it materialises. </p></li><li><p><strong>Rising protectionism: </strong> Higher tariffs reduce US trade and weaken its standing as a reliable trading partner, giving other countries fewer reasons to use and hold dollars.</p></li><li><p><strong>Expanding use of sanctions: </strong>The number of individuals, companies, banks and governments under US sanctions has increased 10x since 2000. Even entities facing only a remote sanctions risk now have an incentive to develop alternative reserve assets and payment channels.</p></li><li><p><strong>Weakening alliances: </strong>The dollar has historically benefited from US security relationships. Doubts about US commitments to NATO partners and its defence treaty with South Korea could reduce US allies’ willingness to hold a disproportionate share of their reserves or conduct their cross-border business in dollars. A breakdown in these longstanding bargains poses the greatest risk to the currency’s international position.</p></li></ul>.<h2><strong>…With No Credible Alternatives</strong></h2><p>Gold has regained its importance among emerging-market central banks since the Global Financial Crisis. It offers diversification and protection from foreign asset freezes. However, its role in international finance may remail limited given its volatile price, inability to earn interest and inconvenience as a form of payment. Meanwhile, the Euro is constrained by the shortage of safe, liquid public assets. Euro-zone governments with the strongest ratings have only issued bonds worth around 4 tn euros, compared with roughly $40 tn of US federal debt, with much of this supply locked within national banking and insurance systems. Fragmented capital markets and the absence of common fiscal, defence and foreign policies further limit the currency's reach.</p><p>Despite China being the world’s largest trading nation, the renminbi represents barely 2% of global reserves. The internationalisation of the currency only began 10-15 years ago, and Chinese financial markets remain partly closed and slower economic growth will delay cross-border activity expansion. The renminbi can gain share but catching up with the dollar will take much longer than early projections assumed.</p>.<h2><strong>Diversification Will Develop at the Edges</strong></h2><p>Many central banks are reducing their dollar exposures but have done this mainly by moving into smaller currencies rather than the euro or renminbi. The Australian dollar, South Korean won, Singaporean dollar and Norwegian krone have become easier and cheaper to trade as electronic platforms narrow bid-ask spreads. Their appeal also reflects the credibility of small, open and generally inflation-targeting economies. India's limited presence in this group is partly explained by capital markets that are not fully open to foreign investors.</p><p>Digital infrastructure could allow countries to settle cross-border payments without using the dollar. Project mBridge, linking China, Hong Kong, Thailand, the UAE and Saudi Arabia, has processed actual transactions, including some oil trade settled in Renminbi. However, its roughly 4,000 transactions worth $55 bn over 3 years pales relative to the sheer volume of daily dollar clearing. Scaling is a political challenge as members must decide who can join, how the platform will be regulated and how voting power will be distributed. A China-led mBridge and a Western-aligned Project Agora point towards regional networks shaped by geopolitical blocs rather than one global payments platform.</p>.<h2><strong>The Risks Depend on the Pace of Transition</strong></h2><p>A gradual transition would allow the euro, renminbi, gold and smaller reserve currencies to expand their influence while the global system adjusts. Lower dependence on a single currency could make the system more resilient without disrupting trade and finance. An abrupt loss of confidence among private investors and official reserve holders would be far more dangerous. If they moved away from the dollar before alternatives developed sufficient scale, the world could face a liquidity shortage. In the 1930s, sterling’s devaluation and three major US banking crises weakened confidence in both leading reserve currencies. Foreign credit and trade finance became scarcer and more expensive, contributing to the collapse of global trade. An abrupt transition could reduce global liquidity and make foreign credit and trade finance scarcer and more expensive.</p>
