U.S. Dollar Durability
In an era of escalating geopolitical uncertainties, central bankers and financial leaders worldwide are grappling with profound questions about the future stability of the global economy. One of those questions is the following: As the United States reassesses its domestic policies, trade relationships, global commitments, and international alliances, what are the potential implications for dollar dominance?
In the near term, the answer is quite straightforward: The dollar will remain the world’s reserve currency. However, in the longer term, its status may be less certain. Reserve currency status is not a birthright but a privilege that is earned, and one that can be lost through arrogance and neglect—the longer-term threat.
The Dollar's Global Role and Global Dynamics
Recent geopolitical events and U.S. economic policy are causing nations to be less sanguine about U.S. dollar dominance. As the U.S. pivots away from international entanglements and adopts policies that favor less open trade, its relations with Europe, Japan, and other parts of Asia are increasingly strained. These developments have raised questions about security agreements, introduced unsettling trade disputes, and created new uncertainties about the future global economic order. Even within the Americas, U.S relationships with its neighbors Canada and Mexico are under strain, all of which contribute to eroding the trust that underpins the dollar's hegemony. Whether the U.S. is charting a wise course will be widely debated. In the meantime, the world and this nation’s role in it are changing.
For decades, the U.S. dollar has been the linchpin of the international financial system — a status cemented by the Bretton Woods Agreement of 1944. This agreement set the framework that established the dollar as the world’s primary reserve currency, initially backed by gold and later sustained by the sheer economic might of the United States. Despite the recent global turmoil, the dollar still accounts for more than half of the world's trade invoicing and approximately two-thirds of official foreign exchange reserves, and it continues to serve as the dominant currency for more than half of global gross domestic product (GDP). The dollar’s status has facilitated international trade, investment, and financial stability, providing a reliable store of value and medium of exchange.
Tariff Wars and the Dollar
For now, the dollar's reserve currency status remains robust. But it is not without its challenges, and there are clear signs of growing discontent.
Recent U.S. tariffs have triggered growing resentment among trading partners. Imposed harshly and unpredictably, U.S. tariffs have created an unstable environment and threaten global economic stability. The International Monetary Fund (IMF) noted that U.S. tariffs, imposed between 2018 and 2019, disrupted supply chains and weakened global economies. Economists, drawing from historical examples like the Smoot-Hawley Tariff Act of 1930, warn that such policies can provoke a vicious cycle of economic retaliation among nations, harming all.
As a result, the world is showing increased frustration with the U.S. and the power of its dollar. As early as 2019 Mark Carney, then governor of the Bank of England and now prime minister of Canada, delivered a significant speech in which he revisited the idea of creating a global "synthetic hegemonic currency" aimed at reducing dollar dominance. Originally proposed by John Maynard Keynes in the 1940s, this concept envisions a supranational currency that would lessen reliance on any single nation's money. While Carney’s remarks had little immediate impact, more recently, leaders such as Christine Lagarde, president of the European Central Bank, have begun to question the dollar’s dominance and advocate for a global reserve system that incorporates a mix of leading currencies.
Emerging economies have also voiced their goal of being less dependent on the dollar. The BRICS nations (Brazil, Russia, India, China, and South Africa) have discussed alternatives to the dollar-dominated system, including forming bilateral agreements in local currencies. China has been especially aggressive in this regard and has attempted to expand its currency’s role, particularly in Asia. These developments, while nascent, could gain momentum if U.S. trade relationships sour and trade agreements stall, potentially ending in a more fragmented global economy and currency landscape.
U.S. Debt Financing: The Dollar’s Achilles Heel
While U.S. tariffs may handicap global growth and create heightened resentment among U.S. trading partners, they alone are not likely to end the dollar’s reserve currency status. As long as the U.S. remains the world’s leading economy, no other country or mechanism is likely to replace it. The true long-term threat to dollar dominance lies in a loss of confidence in the U.S. economy and its policies. U.S. tariff policy may be a factor, but the more critical vulnerability stems from its fiscal and monetary policies.
Since 2007, government expenditures—driven by entitlement programs, defense spending, an interest on the national debt—have increased from nearly 18 percent to over 23 percent of GDP, while revenues have been steady at around 17 percent. During this period, the national debt has increased from $9.3 trillion (63 percent of GDP) to over $36 trillion (121 percent of GDP). Projections suggest that without meaningful fiscal reform, federal debt could exceed $55 trillion within the next decade.
Such policies significantly increase the supply of U.S. government debt on the market. The foreign sector, because of the dollar’s relative safety and reliability, has historically been a dependable buyer, holding nearly $9 trillion of U.S. Treasury securities. But there is no guarantee that this demand will persist. As U.S. debt levels rise and trade dynamics shift, foreign appetite for dollars may diminish, placing pressure on domestic buyers to pick up the slack. As supply exceeds demand, interest rates will have to rise to attract investors—raising borrowing costs and hampering capital investment and economic growth.
Perhaps unfortunately, Congress has learned that the Federal Reserve System (Fed) can be very useful as a standing facility capable of creating trillions of new dollars to absorb the public debt, temporarily suppressing interest rates. Over recent decades the Fed has seldom disappointed Congress in fulfilling this role, with unfortunate effects on the allocation of U.S. resources and increases in asset and consumer price inflation. As long as the Fed continues this practice, it enables Congress to spend beyond sustainable limits, perpetuating the cycle of debt accumulation. The immediate effects may be an inflationary boom, but over time the dollar will lose value and lose appeal as a reserve currency. Already, interest payments on the national debt exceed U.S. defense spending.
The Congressional Budget Office (CBO) and most economists warn that continuing deficits at current levels is unsustainable. The CBO projects that U.S. real growth over the next 10 years will decline from an average rate above 2 percent to less than 1.8 percent. Institutions such as the IMF also warn that these trends are destined to undermine long-term stability. Despite these warnings, Congress continues its pattern of excessive spending and debt accumulation, relying on the Fed to back the Treasury. History warns that economic strength follows from budgetary and monetary discipline, not reckless spending.
A Better Choice
The global economic system must evolve toward a more balanced framework. Drawing on historical models like the Bretton Woods Agreement, policymakers must establish clear rules to govern trade and financial conduct. For the U.S. to maintain its leadership role and the dollar’s dominance, it must more responsibly manage its economy in the decades ahead. If it continues to prioritize short-term goals and to accumulate massive debt, its economic influence will gradually erode along with the dollar’s global role. China understands this, as does most of the world.