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The Dollar Standard

Michael

Photo by Michael Guesev, Interior of the Louvre, Paris 2024

The Dollar’s Enduring Dominance: Why the USD Remains the World’s Reserve Currency

Open the financial page of any newspaper and you’ll see references to the U.S. dollar. Oil prices are quoted in dollars, emerging-market debts rise and fall with the dollar’s strength, and central banks carefully manage their dollar reserves. The dollar’s dominance in global finance is unparalleled in modern history. As of late 2025, the U.S. dollar remains the world’s primary reserve currency, the unit of account for most trade and commodities, and the safe-haven asset of choice for investors in times of turmoil. This post examines how the USD achieved and maintains this dominant status, what advantages and responsibilities it grants the United States, and what challenges or changes might lie ahead. We will consider the legacy of Bretton Woods, current usage patterns of the currency, the “exorbitant privilege” of issuing the reserve currency, and potential competitors ranging from the euro to China’s renminbi, as well as digital currency alternatives.

The Extent of Dollar Dominance in 2025

By the Numbers: The U.S. dollar’s outsized global role is evident in a wide array of financial metrics. Nearly 60% of official foreign exchange reserves disclosed by central banks are held in U.S. dollars at around 58% as of 2024, far surpassing the next closest reserve currency (the euro, at about 20%). This amounts to roughly $7–8 trillion in USD reserves held by foreign central banks. On the international foreign exchange market, the USD is on one side of about 88% of all currency trades, a share that has held remarkably steady for decades. The dollar also anchors the global trading system: an estimated 50–60% of global trade invoices are denominated in the currency, even though the U.S. accounts for only about 10% of world trade by value1. In regions like the Americas and Asia-Pacific, the dollar’s role is especially pronounced with roughly 96% of trade in the Americas and 74% in Asia-Pacific is invoiced in USD. Key commodities such as oil are universally priced in dollars, reinforcing its role as the default currency for commerce. On the payments side, around half of all international payments sent through SWIFT are in dollars (and the share is closer to 60% if one includes euro-area intra-regional payments). Major financial hubs like London, Hong Kong, and Singapore conduct enormous volumes of dollar transactions daily. In short, the USD is the lingua franca of global finance. Economists often point to network externalities at play: the more people worldwide use the dollar, the more useful and convenient it becomes, which in turn encourages even wider use.

Dollar-Denominated Debt and Banking: The U.S. dollar’s dominance extends deeply into debt markets and international banking. Roughly 60% of outstanding international debt securities (bonds and loans issued outside the borrower’s home market) are denominated in USD. The euro, by comparison, accounts for only about 26% of this foreign-currency debt market. Global banks also rely heavily on the dollar: about 55% of cross-border loans and other international claims are in USD, as are around 60% of cross-border liabilities (deposits). This means that a majority of global banking activities across currencies involve dollars on one side of the transaction. The reasons are practical, borrowers around the world find ample USD liquidity and lenders trust that dollar assets will hold value. Even outside official finance, U.S. currency circulates widely: estimates suggest over $1 trillion in U.S. paper currency is held abroad in cash form, providing a store of value in countries with less-stable currencies.

Currency Anchor and Safe Haven: The dollar’s leading role is further cemented by its use as an anchor or reference point for other currencies. More than half of countries around the world effectively tie their currency’s value to the USD in some form, whether through explicit pegs or by managing exchange rates within tight ranges. This reflects trust in the dollar’s long-term stability. During global crises, the dollar consistently emerges as the safe-haven currency. Investors worldwide flock to U.S. Treasury bonds for safety and liquidity, often driving the dollar’s value up in turbulent times. Indeed, even crises that begin in the United States tend to reinforce its international status. For example, during the 2008 global financial crisis (which originated in the U.S.), panicked investors around the globe still rushed into USD assets, perceiving them as the “least dirty shirt” available for safety. The same occurred in early 2020 during the pandemic shock, when demand for dollars spiked and the U.S. Federal Reserve had to extend emergency dollar swap lines to other central banks to alleviate a global USD shortage.

Taken together, these facts illustrate a remarkable reality: the dollar’s international usage far exceeds America’s share of the global economy or trade. The U.S. produces about 24% of world GDP and about 10% of trade, yet the dollar’s share in most international finance metrics ranges from 50% to 90%. An aggregate index of international currency usage constructed by Federal Reserve researchers shows USD holding a dominant index value around 65–70 consistently over the past two decades, whereas the next closest currency (the euro) is below 25 on that index. Clearly, the currency’s supremacy is deeply entrenched as of 2025.

Historical Rise: From Bretton Woods to the Petrodollar

This dominance did not happen by accident, nor did it emerge overnight. Its roots trace back to World War II and the Bretton Woods conference of 1944, where Allied nations designed the post-war international monetary system. Under Bretton Woods, the U.S. which then held ~70% of the world’s gold reserves and had an unrivaled industrial economy, committed to peg the dollar to gold at $35 per ounce, while other participating currencies were agreed to be pegged to the dollar. In effect, the U.S. dollar became “as good as gold.” Foreign central banks could hold dollars knowing they were convertible into gold on demand, which gave them full confidence in the dollar’s value. Thus, USD emerged as the anchor of that system and the primary reserve currency of the post-war era.

French Finance Minister Valéry Giscard d’Estaing famously lamented the “exorbitant privilege” this arrangement gave the United States the ability to print the world’s reserve currency and run external deficits without facing the same immediate constraints as other countries2. The world was in a sense offering the U.S. an interest-free loan by willingly holding dollars and U.S. Treasury securities as reserves. That privilege persists in modified form to this day. During the Bretton Woods decades, the U.S. benefited from consistent demand for dollars abroad, even as it pursued expansive fiscal policies.

Bretton Woods lasted until 1971. By the late 1960s, U.S. inflation had risen and American overseas spending (particularly on the Vietnam War) led to doubts about the dollar’s fixed value. Foreign central banks accumulated more dollars than the U.S. had gold to back them, raising concerns about a run on U.S. gold reserves. In August 1971, President Richard Nixon “closed the gold window,” suspending dollar convertibility to gold. This effectively ended the Bretton Woods system of fixed exchange rates. Yet tellingly, the dollar’s central international role survived the transition to floating rates. By 1971, global finance was already so accustomed to using USD that the currency remained the linchpin of the system even without a gold peg.

Several developments in the 1970s further entrenched the currency. After the oil price shocks of the 1970s, major oil-exporting nations (OPEC) agreed by the mid-1970s to price oil exclusively in dollars, officially giving rise to the term “petrodollar.” This meant any country needing to import oil (which is every industrial economy) had to maintain a large stash of USD. Oil exporters in turn invested their surplus “petrodollars” in dollar-denominated bank deposits and U.S. securities, recycling them through global financial markets (often via London or New York). The result was a self-reinforcing ecosystem: the dollar was needed for oil and commodity transactions, which funneled dollar earnings back into U.S. financial markets, bolstering their depth, and further incentivizing other countries to conduct trade and borrowing in the currency.

Meanwhile, no other currency was ready or willing to take the dollar’s place. The British pound sterling had been the dollar’s predecessor as leading reserve currency in the early 20th century, but by the post-WWII period the UK economy was in relative decline and the pound had lost credibility after repeated devaluations. Other currencies like the German Deutschmark and Japanese yen became strong in the 1970s–1980s as those economies grew; however, those countries’ financial markets were smaller and less open at the time. Critically, Germany and Japan (and many other surplus nations) were reluctant to encourage international use of their currencies, because a large increase in foreign demand could drive up their currency value and hurt export competitiveness. Thus, even as their economies grew, the yen and mark never approached the dollar’s global usage.

It wasn’t until 1999, with the creation of the euro, that a truly serious challenger to the dollar re-emerged. The euro inherited the economic weight of a unified Eurozone economy and quickly became the world’s second most-used currency. At its peak the euro comprised around 25% of global FX reserves in the early 2000s, though it later settled closer to 20%. The euro now dominates finance and trade within Europe and even in parts of Africa and Eastern Europe where it’s widely used. However, it has not displaced the dollar globally. Structural issues in the Eurozone limit the euro’s appeal as a universal reserve: there is no single pan-European “safe” government bond market comparable to U.S. Treasuries (investors must choose among many Euro-area sovereign bonds, each with different risk profiles). The euro area also lacks full fiscal union, which became painfully evident during the Eurozone debt crisis of 2010–2015. Periodic doubts about the cohesion of the Eurozone (as during that crisis) have made some reserve managers hesitant to bet too heavily on the euro. As a result, the euro is a strong regional currency but hasn’t achieved the same global network reach as the dollar.

In summary, historical contingency and deliberate policy choices both put the dollar at the center of the international system by the late 20th century. By the time Bretton Woods collapsed, the world was already on a “dollar standard.” The subsequent decades only reinforced it through petrodollar recycling, the lack of viable alternatives, and the continuous expansion of U.S. financial markets.

Pillars of Dollar Dominance: Why the Dollar Standard Persists

Why does USD continue to reign supreme in 2025, despite the emergence of other large economies and various technological changes? The answer lies in a self-reinforcing trio of fundamental strengths: stability, liquidity, and acceptability, further underpinned by unique features and scale of the U.S. economic and financial system.

1. Economic and Institutional Stability: The United States, while not always the fastest-growing economy, is enormous, diversified, and has a long record of macroeconomic stability relative to other nations. The U.S. has never experienced hyperinflation or an outright sovereign default in the past century. Until recently, inflation was remarkably low and steady, averaging around 2–3% annually from 1980 to 2020. Even after the pandemic-era inflation spike in 2021–2022, the Federal Reserve took aggressive action (raising interest rates sharply) to restore price stability, signaling its commitment to protecting the dollar’s purchasing power. The credibility of U.S. institutions is a major draw for international investors. The Federal Reserve is widely respected as a capable and independent central bank. The U.S. legal system upholds strong property rights and the rule of law, giving foreigners confidence that their dollar assets won’t be arbitrarily seized or contracts violated. Even during intense domestic political standoffs as for example debt-ceiling showdowns in Congress, global markets have largely remained confident that the U.S. government will ultimately honor its obligations. This kind of deep institutional trust is hard to replicate in many other countries. It’s notable that a large majority of countries holding substantial dollar reserves are U.S. allies or partners, reflecting a geopolitical confidence in the U.S. as a steward of the global financial order. In contrast, rivals or adversaries of the U.S. have fewer attractive alternatives (more on that in a later section). In short, USD benefits enormously from the trust in U.S. economic management and political stability, trust earned over decades and reinforced during global crises when the U.S. has acted as a financial backstop.

2. Depth and Liquidity of U.S. Capital Markets: The United States offers the deepest and most liquid financial markets on the planet, a critical advantage for a reserve currency. The U.S. Treasury market with over $28 trillion in marketable Treasuries outstanding is by far the world’s largest and most liquid bond market. In times of crisis, investors from every region seek out U.S. Treasuries because they know they can transact in huge volumes quickly, with minimal price impact. This “flight to quality” into Treasuries occurred in 2008, 2020, and other stress episodes, solidifying the Treasury’s status as the ultimate safe asset. By early 2025, foreign investors (central banks and private alike) held about $9 trillion in U.S. Treasuries, roughly one-third of all Treasuries outstanding. This extraordinary foreign demand keeps U.S. borrowing costs lower than they otherwise would be, an embodiment of the “exorbitant privilege.” In addition to government bonds, U.S. equity and corporate debt markets are the world’s largest, offering international investors unrivaled breadth of options. The U.S. stock market, for instance, has a total capitalization in the tens of trillions of dollars and lists many of the globe’s most valuable companies. The dollar-denominated collateral ecosystem is also unparalleled: U.S. Treasuries and other dollar assets serve as the primary collateral for global lending and derivative markets, greasing the wheels of finance. Major banks and institutions worldwide hold U.S. securities not only for investment, but to pledge in repo markets or as margin for derivatives, knowing these assets are universally accepted and retain value even under stress. Competing currencies lack such a comprehensive financial ecosystem. For example, Germany’s government bonds (Bunds) are exceedingly safe, but their supply is limited and there simply aren’t enough German Bunds for the world to use as the backbone of a financial system. Emerging market currencies, on the other hand, might offer higher yields but suffer from shallow, illiquid markets that cannot absorb large safe-haven inflows. The scale and liquidity of dollar markets create a positive feedback loop: global investors place funds in dollar assets because they are liquid and deemed safe, and that very flow of funds further deepens the liquidity and stability of those markets.

3. Network Effects and Inertia: The dollar is widely used because it is widely used. This tautology underscores the power of network effects in currency usage. Once a currency becomes dominant, it gains a self-perpetuating momentum. Businesses, investors, and banks all prefer to use the currency that everyone else uses. For a central bank, holding dollars as reserves makes sense because, in a crisis, it can intervene in FX markets or fund emergency needs knowing that other parties will readily accept dollars. For exporters and importers, invoicing in dollars simplifies transactions as buyers around the world are accustomed to pricing in dollars, reducing frictions. Financial contracts, from oil futures to international loans, are overwhelmingly structured in USD, so participants naturally continue that practice. This creates a coordination equilibrium that is hard to disrupt. Switching to a different currency en masse would require a coordinated shift by millions of actors, which is highly unlikely absent a major shock. The incumbent advantage of the dollar means that even if a rival currency has some appealing features, no single actor wants to be the first to move large reserves or contracts away from dollars for fear that others won’t follow. In essence, the world is “locked-in” to using the dollar to a significant degree. Economists refer to this as path dependence or inertia – and in the dollar’s case, it has been reinforced by the currency’s reliable performance. As long as the U.S. avoids egregious mismanagement of the currency (e.g. runaway inflation or outright asset confiscation), the path of least resistance for most countries and investors is to keep using the existing dollar-centric system. This inertia is so strong that, as noted earlier, even a U.S.-centered financial crisis often ends up boosting the dollar’s role (the so-called “Dollar Trap” phenomenon).

These three pillars, stability, liquidity, and network effects, together produce what Giscard d’Estaing termed the dollar’s “exorbitant privilege.” Because so many global investors and central banks want to hold dollar assets, the United States government can finance itself at lower interest rates than it otherwise could. U.S. Treasury bonds enjoy insatiable foreign demand; as of 2025, foreigners hold roughly one-third of U.S. Treasuries, which helps keep yields (interest rates) on those bonds lower than if demand were only domestic The savings in interest costs for U.S. taxpayers are substantial, and Washington can run larger budget deficits without immediate stress. Additionally, the U.S. can run persistent trade deficits importing more than it exports year after year without a collapse of its currency. In a normal country, running large, sustained trade deficits would erode confidence and put downward pressure on the currency (as foreigners grow unwilling to keep accumulating claims on the deficit country). The U.S., however, has been able to run trade and current account deficits for decades because other countries actively want dollar assets in their reserves or for their private sectors. The dollars the U.S. spends on imports often just get reinvested back into U.S. assets by the surplus countries. This dynamic was pointed out in the 1960s by economist Robert Triffin, known as the Triffin dilemma: the issuer of the global reserve currency must supply the world with liquidity (i.e. run deficits) to meet growing international demand, but doing so can undermine confidence in the currency over time. The U.S. has navigated this dilemma so far because global demand for dollars has continued to rise alongside global trade and GDP growth, and because the U.S. economy has remained fundamentally resilient. In effect, as the world economy expands, it soaks up more dollar liquidity further allowing the U.S. to sustain deficits that might otherwise be unsustainable.

Beyond these economic benefits, dollar dominance also gives the United States significant geo-financial leverage. Since so much of global trade and finance flows through the dollar system, the U.S. government can exercise power by controlling access to that system. Sanctions are the clearest example: If the U.S. Treasury “blacklists” a foreign bank or government, cutting off its access to U.S. dollar clearing and banking, that entity is largely shut out of a huge portion of global commerce. In recent years, this financial weapon has been wielded against countries like Iran, North Korea, and most prominently Russia. After Russia’s invasion of Ukraine in 2022, the U.S. and allies froze Russia’s dollar (and euro) reserve assets and disconnected major Russian banks from SWIFT and dollar clearing. This had a crushing effect on Russia’s ability to transact internationally. Firms worldwide, even in non-sanctioning countries, became hesitant to deal with Russia if it meant losing access to dollar markets. While Russia and others have tried to transact in alternate currencies (like rubles, yuan, or gold), those efforts have only partially mitigated the damage because most of their trading partners still ultimately rely on the dollar system. Even China as a major geopolitical rival of the U.S. keeps the majority of its $3 trillion in foreign reserves in dollar assets, both because of a lack of alternatives and because Chinese policymakers recognize U.S. Treasuries as among the safest places to park large sums. Thus, ironically, America’s adversaries often remain indirectly under the umbrella of the dollar’s dominance. (It’s worth noting that many of these adversaries are export-driven economies that accumulate dollar reserves by running trade surpluses with the U.S. or others, and they face structural limits in switching to non-dollar trade without incurring significant economic costs3.)

Costs and Responsibilities of the Dollar’s Supremacy

While the U.S. enjoys substantial benefits from issuing the world’s reserve currency, this status is not without downsides and obligations. One cost can be a stronger currency than fundamentals might dictate, which makes U.S. exports less competitive. Because global demand for dollars and dollar assets is so high, the dollar’s exchange rate tends to be higher than it would be otherwise. American manufacturers sometimes struggle to sell abroad due to a relatively expensive USD, contributing to industrial job losses and persistent trade deficits. Regions of the U.S. that rely on export industries (such as parts of the Midwest’s industrial belt) have long complained about the dollar’s strength hurting their competitiveness. This is the flipside of “exorbitant privilege”, call it the exorbitant burden on certain domestic sectors.

Triffin’s dilemma also looms as a long-run concern: meeting the world’s growing appetite for dollars by running ever-larger U.S. deficits could, at some point, undermine confidence in U.S. finances. The U.S. federal debt has indeed grown substantially, surpassing 100% of GDP, raising questions about fiscal sustainability. In 2023 and 2025, major rating agencies like Fitch and Moody’s even downgraded the U.S. government’s credit rating from AAA, citing fiscal concerns and political brinkmanship over the debt ceiling. Thus far, these developments have not caused any exodus from the USD as global reserve holdings and Treasury demand have not materially declined. However, the U.S. must be mindful that its privileged position depends on maintaining investor trust. A loss of confidence through uncontrolled inflation or a debt crisis could erode the dollar’s safe-haven image. In that sense, the U.S. bears a responsibility to manage its economic policies with an eye to their international repercussions, not just domestic effects.

Additionally, U.S. monetary policy has spillover effects on the rest of the world due to the dollar’s central role. When the Federal Reserve raises interest rates sharply (as it did in the early 1980s and again in 2022–2023), it tends to strengthen the dollar and tighten global financial conditions. Higher U.S. rates and a stronger dollar can trigger capital outflows and currency pressures in emerging markets, sometimes precipitating financial crises abroad. A historical example is the early 1980s: the Fed’s aggressive rate hikes to tame inflation sent U.S. interest rates soaring above 15%, the dollar appreciated strongly, and many developing countries with dollar-denominated debts (in Latin America, for instance) found themselves unable to service those debts. This contributed to the Latin American debt crisis of the 1980s. More recently, as the Fed raised rates in 2022–2023, countries from Turkey to Argentina felt strains as their currencies fell and dollar funding became more expensive. Conversely, when the Fed eases policy or floods the system with liquidity (as after 2008 or during 2020’s pandemic response), it can send waves of capital into emerging markets (“hot money”), sometimes inflating asset bubbles there. In short, the Fed’s domestic mandate belies its de facto role as a central bank to the world. This can create tension and foreign officials have frequently complained that the U.S. “exports” instability via its monetary policy. The U.S. typically responds that its policies are set for domestic needs and that other nations have the responsibility to manage their own economies. Nonetheless, the global ramifications are inescapable, and the Fed in recent years has acknowledged these international considerations more openly. For example, it now coordinates with other central banks through swap lines during crises to mitigate dollar liquidity crunches abroad, effectively acting as a lender of last resort globally when no one else can.

Lastly, wielding the dollar’s power for geopolitical aims (through sanctions) can carry long-term risks. If overused, it might encourage targeted countries and even neutral ones to develop alternative systems outside of the dollar’s reach. We have seen a number of countries, from the BRICS bloc (Brazil, Russia, India, China, South Africa) to smaller economies under U.S. sanctions, start to discuss “de-dollarization” more actively in recent years. We turn next to an analysis of these efforts and whether any credible alternative to the dollar is on the horizon.

Challenges to the Dollar: Myths and Realities of “De-Dollarization”

Every so often, debates flare up about whether the dollar’s dominance is waning. As U.S. debt grows and geopolitical power diffuses, some argue a multipolar currency world will replace the unipolar dollar system. Indeed, history reminds us that no currency’s reign is permanent; the British pound lost its preeminence to the dollar by the mid-20th century, and earlier the Dutch guilder had been eclipsed by sterling. Could the dollar be the next to fall? In 2025, the prevailing view is that any shift will be evolutionary and likely gradual, not sudden. Near-term threats to the dollar’s status appear limited, but over a longer horizon, certain developments could incrementally chip away at its dominance. Let’s examine the usual suspects often touted as challengers: the euro, the Chinese renminbi, a putative BRICS currency or gold standard, and digital currencies.

The Euro – A Partial Challenger, Bound by European Constraints: The euro is supported by the large collective economy of the Eurozone (comparable in size to the U.S.) and has a well-regarded central bank in the ECB. In Europe’s neighborhood, the euro functions much like the dollar does globally; it’s widely used for trade, investment, and reserves within Europe and some adjoining regions. Some optimists have long believed the euro could take on a much larger global reserve role, especially if Europe deepened its financial integration. There have been steps in this direction: during the COVID-19 crisis, the EU initiated mutualized European debt issuance for the first time and by mid-2025, about $750 billion of jointly backed EU bonds had been issued. If the EU were to build on this and create a substantial supply of common “Eurobonds” (akin to U.S. Treasuries backed by the entire euro area), it would significantly boost the euro’s attractiveness as a reserve asset. More integrated European capital markets and banking union would also help its cause. However, these developments are unfolding slowly and face political hurdles. Europe’s fiscal and political union remains incomplete, and divergent national interests often hamper quick action. Even as the Eurozone pursues reforms, it contends with an inherent fragility: it is a currency shared by 20 disparate nations, and that diversity of economic conditions and politics can be a source of uncertainty (as seen in crises like Greece’s near-default). In the eyes of many reserve managers, the euro simply cannot (yet) replicate the dollar’s uniquely single-sovereign backing and consistency. Thus, while the euro will likely maintain its position as the clear #2 international currency, moving from 20% to challenge the dollar’s ~58% of global reserves would require a quantum leap in European integration or a severe U.S. misstep. Neither appears imminent as of 2025.

China’s Renminbi (RMB) – Rising in Regional Use, but Global Constraints Persist: Given China’s meteoric rise to become the world’s second-largest economy and its #1 trading nation, it’s natural to ask if the Chinese renminbi (also known as the yuan) will assume a much larger international role. China’s government has explicitly pushed for RMB internationalization over the past decade. It has established bilateral currency swap lines with dozens of other central banks to facilitate trade settlement in RMB. It created CIPS, an alternative payments network to SWIFT, to reduce reliance on Western-controlled messaging systems. Trade partners from Russia to some African and Asian countries have been encouraged to use RMB for bilateral trade instead of dollars. These efforts have shown some results: the RMB is now included in the IMF’s Special Drawing Rights basket (a nod to its importance), and by some measures the RMB accounts for a small but growing share of trade settlements, especially within Asia. Notably, after Russia’s exclusion from much of the dollar system in 2022, Russia began conducting a larger share of its trade (like oil sales to China and India) in rubles or yuan. As of mid-2025, the renminbi reportedly makes up about 50% of the currency usage in trade between BRICS countries (a dramatic rise largely due to Russia-China trade). However crucially the RMB’s global reach still remains very limited. In official foreign exchange reserves, the RMB accounts for only about 2–3% of disclosed reserves. In global payments via SWIFT, the RMB’s share is likewise on the order of 2–3% (it briefly hit 3% of SWIFT flows, then slid back). Even in foreign exchange trading, the RMB is involved in maybe 5–7% of transactions, far below the dollar’s 88%.

Why hasn’t the RMB gained more global traction despite China’s economic might? The answer lies chiefly in China’s own policy choices and financial system limitations. Critically, the RMB is not freely convertible on the capital account and Beijing maintains strict capital controls to manage the currency’s value and protect its domestic financial stability. Foreign investors cannot freely move large sums in and out of Chinese markets without regulatory approval, which severely limits the RMB’s appeal as a reserve asset (central banks value liquidity and flexibility which the dollar and euro provide while the RMB currently does not). Additionally, China’s legal and institutional framework does not yet inspire the same level of confidence. The Chinese Government can and does intervene in markets and businesses in ways that could affect foreign holdings (for instance, sudden regulatory crackdowns or even the risk of asset freezes in a geopolitical spat). For a reserve manager or global investor, this unpredictability and lack of full rule of law is a significant deterrent to holding too many RMB assets. Moreover, China’s domestic financial markets, while large, are not as open or liquid to foreigners. The Chinese bond market is huge but dominated by domestic banks, and trading volumes are nowhere near U.S. Treasury market levels for foreign participants. Finally, the RMB’s value is still managed by the People’s Bank of China within a band, not fully market-determined. Ironically, this stability of exchange rate (which China maintains for its own economic reasons) means the currency doesn’t trade as freely internationally.

All these factors mean that most analysts do not foresee the RMB overtaking the dollar unless China undertakes major reforms such as completely opening its capital account and significantly strengthening legal protections for investors. As of 2025, Chinese authorities have shown only limited willingness to take those steps, as doing so would constrain their control over the economy (something they are loath to give up). The RMB will likely play a growing role in regional Asia and in trade with partners like Russia or Iran who are eager to bypass the dollar, but from today’s vantage point it has a long way to go to challenge the dollar’s global dominance.

A BRICS Common Currency or Gold – More Myth Than Reality: Outside of the euro and RMB, the other oft-cited “alternative” is a hypothetical new currency arrangement among emerging powers particularly the BRICS. There have been periodic discussions or political statements about BRICS countries devising their own reserve currency or using a basket of currencies or even gold to settle trade. For example, ahead of the 2023 BRICS summit, there was feverish speculation (especially in some media and online forums) that the BRICS might announce a gold-backed currency to rival the dollar. In practice, nothing of the sort has materialized. The BRICS summit communiqués in 2023 and 2024 made no mention of a new currency. Brazil, Russia, India, China, and South Africa have very different economies and agendas, and they have not established any concrete mechanism for a shared currency or clearing union. Even a BRICS payments system to facilitate cross-border transfers in their local currencies is only in the early discussion phase. Russia and Iran have floated the idea of using gold or cryptocurrencies for trade settlement, but these remain niche experiments at best. The fundamental problem is that without a unified political and economic union (akin to what Europe did for the euro), a “BRICS currency” is a political slogan, not a workable substitute for the dollar. Each of the BRICS currencies (perhaps with the partial exception of the RMB) suffers from issues of convertibility, stability, or limited capital markets. Moreover, as noted, even if they trade more in each other’s currencies, that covers only a portion of transactions. BRICS trade in goods was about $33 trillion in 2024 (roughly one-third of global GDP). But the vast majority of cross-border financial transactions globally, which dwarf trade flows, still occur in major currencies like the dollar. The global foreign exchange market alone turns over an astonishing $7.5 trillion per day, meaning in less than a week it exceeds the value of a year’s trade in goods and services. In those financial markets, the dollar’s dominance (88% of trades, as noted) remains largely unchallenged. In short, the “de-dollarization” narrative among a coalition like BRICS faces structural headwinds: their own currencies aren’t ready for prime time, and the dollar-centric financial network is deeply entrenched. Even some BRICS members acknowledge this reality and a much-touted BRICS “common currency” was officially taken off the agenda at their 2025 summit. The most likely outcome is incremental, limited steps: e.g. more bilateral trade in local currencies where feasible, greater accumulation of gold (many central banks including in China, Russia, Turkey have been buying gold to diversify reserves), and perhaps marginal use of alternatives like the IMF’s Special Drawing Rights (SDR) or regional mechanisms. These moves may slightly reduce the dollar’s share at the margins over a long period. Indeed, the dollar’s share of global reserves has declined from over 70% in 2000 to about 58% today. But that shift (roughly 0.5 percentage points per year) has been very gradual, and largely reflects diversification into a basket of smaller currencies (Australian, Canadian dollars, Korean won, etc.) rather than any one rival currency replacing the USD.

Digital Currencies – Crypto, Stablecoins, and CBDCs: Could technological innovation upset the dollar’s dominance? Some argue that a new form of currency such as a cryptocurrency, a globally coordinated central bank digital currency (CBDC), or some other fintech innovation might reduce reliance on the dollar. At this moment, however, technology appears more likely to reinforce the dollar’s role than upend it. Consider cryptocurrencies: Bitcoin and similar crypto assets are sometimes touted by enthusiasts as alternatives to fiat currencies. Yet their extreme price volatility, limited scalability, and lack of government backing make them unsuitable as reserve assets for central banks or large institutions. Even stablecoins (cryptographic tokens pegged to fiat currencies) overwhelmingly reference the dollar. In fact, about 99% of the market capitalization of stablecoins is linked to the U.S. dollar – effectively making crypto markets an extension of dollar dominance rather than a rival system. Popular stablecoins like Tether (USDT) or USD Coin (USDC) are backed by dollar assets, meaning users of these tokens are essentially using digital dollars. Some commentators suggest that as stablecoins and digital finance grow, they will further entrench “digital dollarization,” especially in countries with unstable local currencies4.

What about official digital currencies? Many central banks are developing their own CBDCs (Central Bank Digital Currencies) for retail or interbank use. However, these will still be denominated in the respective country’s unit (a digital euro is still a euro, a digital yuan is still a yuan, etc.). They may make payments more efficient, but they don’t inherently change the calculus of reserve composition or currency choice for trade, which depend more on economic fundamentals and trust. There have been proposals for a global multilateral digital currency or a wider use of the IMF’s SDR (a composite unit of multiple currencies). The SDR’s weight, however, is dominated by the dollar (currently about 42% of the SDR basket is USD), and SDRs have seen only limited use as a reserve asset in practice. Without political unity to create something like a “digital bancor” (to hark back to Keynes’s 1940s idea), these proposals remain academic.

In summary, none of the often-discussed alternatives, euro, RMB, gold, crypto, or a new BRICS currency, currently presents a credible comprehensive replacement for the U.S. dollar. Each has notable drawbacks or limitations, and many of the moves to “distance” from the dollar (such as trading in local currencies) address a small slice of trade while leaving the far larger financial flows still dollar-centric. The most plausible scenario is a gradual evolution toward a slightly more multipolar system: the dollar might slowly decline from ~58% of reserves to, say, ~50% over a decade or more, with the euro perhaps picking up some share, the RMB increasing modestly (to maybe mid-single-digits), and “other” currencies plus gold making up the balance. This would echo the pattern seen so far – incremental diversification, not a dramatic regime change. Barring a seismic event such as a U.S. hyperinflationary breakdown or a geopolitical rupture fragmenting the world into currency blocs, the dollar’s incumbent advantages suggest it will remain the top global currency for the foreseeable future.

The Dollar System as a Global Public Good

It is worth recognizing that the dollar-centric international monetary system, while conferring outsized benefits on the United States, also provides certain public goods or broad benefits to the world economy. A common currency for international trade and finance greatly reduces transaction costs and exchange rate risks. Companies engaged in cross-border trade do not have to constantly exchange one exotic currency for another for each transaction; they can both use dollars as a stable unit of account and medium of exchange. This simplifies accounting and pricing and facilitates the expansion of global trade. For many countries with small or volatile currencies, access to dollars allows participation in global markets that might otherwise be prohibitive. The dollar also serves as a reliable store of value internationally. In countries suffering from high inflation or banking instability, holding wealth in dollars (whether as physical cash, dollar-denominated bank accounts, or dollar assets) provides a safe haven for individuals and firms. This informal dollarization can stabilize economies where local policies have faltered.

From a financial stability perspective, the U.S., by virtue of issuing the leading currency, has taken on a role akin to the world’s banker or liquidity provider of last resort. The Federal Reserve has, in major crises, extended dollar swap lines to other central banks effectively lending dollars to ensure global liquidity. During the 2008 crisis, and again in March 2020, the Fed opened wide swap lines to the European Central Bank, Bank of Japan, Bank of England, and others, which helped prevent a catastrophic seize-up of global dollar funding markets. No other central bank currently could so readily step in to backstop the international system. In the absence of a dominant currency and a willing central bank leader, such swift coordinated action would be much harder to organize. Similarly, international institutions like the IMF rely on dollars as their effective intervention currency. When the IMF bails out a country, the loan funds are provided in hard currencies (often explicitly U.S. dollars, or in SDRs that are heavily weighted in dollars). The entire global financial safety net from swap lines to IMF programs is thus structured around the dollar or a narrow set of major currencies. If the world were truly multipolar in currencies, crisis management might become more complex; a country in distress might need various currency liquidity lines (e.g. both dollars and euros and others), and coordination among multiple issuing central banks could get messy. The current system, for all its inequities, at least has a clear lynchpin.

These global benefits do not imply the system is optimal or fair to all, but they help explain why there is a degree of collective action inertia in moving away from the dollar. Many countries complain about the dollar’s dominance (and U.S. influence), yet they also implicitly rely on the stability and services the system provides. Until a credible alternative arrangement is proposed that can offer similar benefits: stability, liquidity, unit of account, lender of last resort, it is likely that even those reluctant participants of “dollar hegemony” will continue to use the dollar extensively. In effect, the world has a shared interest in the U.S. maintaining a stable dollar and deep markets, just as the U.S. has an interest in maintaining the dollar’s privileged role.

Conclusion: The Indispensable Currency

The U.S. dollar’s continued reign as the world’s dominant reserve currency in late 2025 is rooted in a powerful mix of monetary pragmatism, historical legacy, and structural advantages. The dollar sits at the center of global trade, finance, and investment not because of any single policy or event, but because it has proven over many decades to meet the needs of the international economy better than any available alternative. The enormous scale and openness of U.S. financial markets, the trust engendered by U.S. institutions, and the network effects of widespread use all reinforce one another.

Looking ahead, U.S. policymakers must manage this “dollar standard” responsibly by maintaining fiscal and monetary discipline to preserve confidence, and being judicious in the use of financial sanctions and other tools so as not to spur other countries to more aggressively seek workarounds. There is no room for complacency: history shows that if a leading currency is mismanaged (as Britain ultimately mismanaged sterling’s role, or as the interwar gold-standard dollar suffered during the Great Depression), the system can and will adjust. But absent a dramatic loss of faith in U.S. stability or a lightning-fast geopolitical realignment, such an adjustment appears unlikely in the near term. The network of dollar usage is self-reinforcing, and potential challengers face high hurdles to displace it.

In all likelihood, the global monetary order in the 2020s will continue to be anchored by the U.S. dollar. We may see incremental moves toward diversification at the margins, a bit more trade invoicing in renminbi here, a modest rise in euro reserve share there, but the dollar is set to remain the indispensable currency at the heart of the system. As a senior U.S. Treasury official once quipped, the dollar’s status is “our currency, but everyone’s problem.” In truth, it is also everyone’s solution as a focal point that greases the wheels of a complex global economy. For investors and institutional readers, understanding the depth of the dollar’s entrenchment is key: many de-dollarization headlines will come and go, but until we see fundamental changes in the pillars of trust, liquidity, and alternative availability, the dollar’s dominance will endure.

Sources

  1. Bertaut, Carol, Bastian von Beschwitz, and Stephanie Curcuru. “The International Role of the U.S. Dollar – 2025 Edition.” FEDS Notes. Washington, DC: Board of Governors of the Federal Reserve System, July 18, 2025.
  2. Board of Governors of the Federal Reserve. Financial Accounts of the United States, Table L.210 and L.204 (data on foreign holdings of U.S. Treasuries and banknotes), 2025.
  3. Boz, Emine, Camila Casas, et al. “Patterns in Invoicing Currency in Global Trade.” IMF Working Paper No. 20-126, 2020.
  4. Cowen, Tyler. “Stablecoins Will Both Replace and Entrench the Dollar.” Bloomberg Opinion, February 12, 2025.
  5. International Monetary Fund. Currency Composition of Official Foreign Exchange Reserves (COFER) database, 2023 (for global reserve currency shares).
  6. OMFIF (Herbert Poenisch). “Brics Currencies Are No Realistic Alternative to the Dollar.” Commentary, July 23, 2025.
  7. Weiss, Moritz. “Sanctions, Geopolitics, and the U.S. Dollar.” In International Finance 25, no. 3 (2022): 336-356.
  8. World Bank. Global Economic Prospects (for trade and GDP figures), 2024.

Footnotes

  1. Carol Bertaut, Bastian von Beschwitz, and Stephanie Curcuru, “The International Role of the U.S. Dollar – 2025 Edition,” FEDS Notes (Federal Reserve Board, July 18, 2025), Figure 7. The U.S. dollar comprised about 58% of global FX reserves in 2024, and its share of global trade invoicing was estimated at 96% in the Americas, 74% in Asia-Pacific, and 79% in the “rest of world” (outside Europe). The dollar is also on one side of ~88% of currency trades and about 60% of international debt is in USD.
  2. Valéry Giscard d’Estaing, France’s finance minister in the 1960s, coined the term “exorbitant privilege” to describe the benefits the U.S. accrued by virtue of the dollar’s reserve currency role – notably, the ability to borrow cheaply in its own currency and run external deficits without immediate currency depreciation.
  3. The major emerging economies often cited as seeking alternatives (e.g. China, Russia) typically run trade surpluses and accumulate reserves. For them to reduce reliance on trading with the U.S./West (and thus on the dollar), they would need to either import more from each other or export less – in other words, reduce their surpluses. This is difficult in the short run given their growth models. As of 2025, the U.S. remains the world’s largest consumer market, and a key destination for export-driven economies.
  4. Tyler Cowen, “Stablecoins Will Both Replace and Entrench the Dollar,” Bloomberg Opinion, Feb. 12, 2025. Cowen argues that dollar-linked stablecoins could extend dollarization in emerging markets by providing digital dollar substitutes, thereby reinforcing dollar dominance for decades