Throughout the post-WW2 era, the dollar has maintained its status as the main international reserve currency. The dollar’s status has reflected its wide use in the pricing and settlement of foreign trade transactions, the large size and openness of its financial markets, and its dominant role in global foreign exchange transactions. Throughout this period, the United States has been the largest economy in the world, representing today around 25 per cent of global GDP.
Recent developments under the Trump administration have raised doubts about the durability of the dollar’s global reserve status. The government’s tariff policy has disrupted global trade patterns and reversed its traditional role as the main promoter of liberalized international trade. The newly protectionist stance of the U.S. will likely reduce its foreign trade flows, weaken its growth prospects, and isolate the country from beneficial trading arrangements.
In fiscal policy, the government has maintained the highest peacetime budget deficits (6 per cent of GDP), with no prospect of their reduction, which have put the debt/GDP ratio on an unsustainable trajectory. The trade and fiscal outlook have been reflected in a steady erosion of the foreign exchange value of the dollar since early 2025 and a sharp rise in the prices of gold and silver, as investors seek “safe havens” from a feared “debasement” of the special status of the dollar. Prior to 2025, U.S. Treasury debt had been viewed as the main safe haven for foreign governments and investors.
The loss of confidence in the dollar has been reinforced by repeated attacks by the President on the independence of the Federal Reserve for monetary policy decisions. If that independence is lost, financial markets will quickly assume that inflationary pressures will increase, as the Fed is forced to maintain low short-term interest rates both to stimulate economic activity and to lower the cost of the government’s growing debt burden. This outcome, however, will be countered by the likely increase in longer term interest rates, as investors raise the premia on treasury debt out of a growing fear of sustained inflation and/or a debt default.
If these prospects are sustained, it is inevitable that the global reserve currency status of the dollar will weaken, as other countries shift to other currencies for their reserve holdings. However, no other country can match the U.S. in terms of the scale and ease of access to its financial markets and the widespread use of the dollar in international trade and financial transactions.
Two currencies that are often viewed as competitors to the dollar are the euro and renminbi. Both the EU and China have economies that are the next largest after the U.S. While the euro is the second largest reserve currency choice after the dollar, it’s share of global reserves is only about one-third that of the dollar. One impediment to increasing that share is that the EU does not represent a single fiscal union with a large market for the purchase and sale of its public debt. Most debt transactions are at the country level, with varying degrees of risk attached. There are plans to increase the volume of union-wide public debt, but these will take time to match that of the United States. The renminbi plays a much less important role than the dollar and the euro as a reserve currency. To a large extent, this can be attributed to the fact that the government maintains controls on the exchange rate of the renminbi and flows into and out of its capital markets.
Digital currencies are viewed by many as a potential alternative to global reliance on the dollar. Central Bank Digital Currencies (CBDCs) are being developed by many countries (e.g., China, the EU and the UK) as a means of increasing the use of their currency and the speed of payments for both domestic and foreign transactions. Experiments have shown that CBDCs can be used to clear and settle international transactions among a group of countries without reliance on the US dollar, which is common today. The U.S. has chosen not to develop a CBDC but is promoting the use of private stablecoins (digital currencies that act like “narrow” banks), believing that these will increase reliance on the dollar for foreign payments; most stablecoins are linked to the dollar and hold most of their reserves in U.S. Treasury debt. However, there are significant risks attached to their widespread use, as they do not carry any official guarantee as do CBDCs.
Recent policy developments in the United States, if maintained, will damage the dollar’s global currency status and lead to a more multipolar reserve currency system, with an increased risk of financial instability, as governments and investors seek alternatives to the dollar.
Featured Author:
Anthony Elson was a senior official of the IMF for many years, and is the author of “The Global Currency Power of the US Dollar: Problems and Prospects.”
All views expressed by members are their own and not reflective of the views of the Bretton Woods Committee.