By Dennis J. SNOWER
For many years, the U.S. dollar’s status as the global dominant reserve currency has granted the United States significant benefits: the capacity to secure loans at minimal interest rates, maintain substantial trade imbalances, and cover government funding gaps through monetary expansion without inevitably causing inflation. However, starting from the beginning of President Donald Trump’s second administration, concerns regarding the “decline of America’s excessive advantage” have transformed into an ongoing concern.
There are valid reasons for worry. Trump’s approaches—ranging from his criticisms of the U.S. Federal Reserve to his relaxed attitude towards cryptocurrency regulations—are gradually eroding the dollar’s position as a global reserve currency. The loss of this dominance would inevitably threaten the sustained stability of the American economy.
However, concentrating only on America’s declining advantage is similar to observing some trees burning while ignoring the large fire developing behind them. The decline of the dollar’s position as a reserve currency would have effects extending well beyond American territory, causing significant disturbances across the world economy.
Financial markets, constantly monitoring possible dangers, require just a significant number of individuals to perceive the risk as genuine for it to materialize. When sufficient investors start offloading an unstable asset, others join in.
Importantly, America’s “exorbitant privilege” is not something it deserves because it is the world’s top superpower. Rather, it is just an outcome of how a reserve currency functions. Similar to individuals, nations require a stable asset, a means of transaction, and a standard measure of value. As overseas economies expand, their desire for dollar-based investments like U.S. Treasury securities and company bonds increases. This increased demand allows the United States to maintain long-term current-account and trade imbalances.
Additionally, U.S. government shortfalls are primarily funded by selling Treasury bonds, which are widely regarded as a secure investment globally. Since a significant portion of this money is held by overseas entities, the Federal Reserve can buy these Treasuries using freshly printed dollars without causing an increase in inflation. High global appetite for American debt helps keep local interest rates lower, as investors are prepared to settle for minimal returns in return for the security provided by dollar-based assets.
The Coming Reserve-Currency Realignment
For a currency to function as a global reserve asset, it needs to be secure, easily tradable, consistent, and broadly recognized. This relies on seven essential factors. Initially, the nation that issues the currency should ensure macroeconomic steadiness: minimal inflation, manageable government debt, and effective financial and monetary strategies that convince investors and central banks that the currency will preserve its worth in the long run.
Secondly, the country issuing the currency needs to possess robust and active financial markets, providing secure and easily tradeable assets—especially government bonds—that can handle significant international capital movements. Public debt becomes a valuable investment only if investors trust that the debt is being handled properly and will be settled on time.
Third, a central bank that remains politically autonomous and dedicated to maintaining stable prices plays a crucial role in establishing trust in a currency, especially when monetary strategies are clear-cut and based on established guidelines.
Fourth, major reserve currencies should be easily transferable and convertible internationally with very few limitations.
Fifthly, the legal framework should maintain adherence to the rule of law. Specifically, it needs to safeguard ownership privileges, enable international investors to enforce agreements, and offer mechanisms for addressing conflicts.
Sixth, a reserve currency should be regarded as a worldwide benefit instead of an instrument for advancing domestic interests — this view depends on effective international leadership and proactive participation in multinational efforts. Finally, the country issuing the currency needs to be a major player in trade and financial matters, since well-established network advantages are essential to drive broad adoption.
Trump’s initiatives have undermined each of these foundations of U.S. economic supremacy. The significant tax reductions central to his poorly named “One Big Beautiful Bill Act,” without corresponding fiscal discipline, are expected to increase the national debt by trillions, threatening overall financial stability. While there is still considerable demand for U.S. Treasury securities, growing debt levels and the potential for default—intensified by Trump’s manipulation of the debt limit as a political tool—have damaged investor trust.
Meanwhile, the Federal Reserve’s autonomy has faced pressure as Trump openly urged officials to reduce interest rates and proposed substituting Chair Jerome Powell and others with politically aligned individuals. While capital restrictions were not enforced, the government’s warnings to block Chinese stock listings and prevent rivals from using SWIFT have created concerns about upcoming accessibility.
The application of presidential power by Trump to penalize foreign companies, block the central bank funds of nations such as Venezuela, require a 15% share of income generated from selling cutting-edge chips to China, and enforce steep import taxes on long-time partners has increased skepticism about American policy reliability. Consequently, allies are looking into options based on the euro or yuan, with certain central banks starting to shift their reserves from dollars towards precious metals and different investments, hastening the currency’s downfall.
Should concerns regarding the dollar’s future stability gain traction, the shift away from the reserve currency will not occur smoothly or in an organized manner. A far likelier result would be economic turmoil, as predictions of monetary changes often become reality through their own influence. When investors anticipate a decline in the dollar, they may divest themselves of dollar-based assets to prevent potential losses. This action, in turn, could cause the value of the dollar to drop, thereby confirming the original apprehension.
The quicker the dollar declines, the greater the urgency for others to abandon their holdings. Large central banks and pension funds might swiftly move reserves toward gold, euros, or yuan, causing Treasury yields to rise as investors ask for better returns to compensate for heightened risks. A weakening US currency may also lead to margin calls on highly leveraged dollar transactions, compelling institutions with substantial exposure to sell off other assets, thereby creating turbulence throughout international financial markets.
There Is No Alternative
Should Trump persist in implementing harsh tariffs and seizing overseas assets, competitors such as the ten-nation BRICS+ alliance of leading developing countries might publicly move away from using the U.S. dollar. This could trigger significant reallocations of foreign exchange reserves and a worldwide competition for alternative secure financial hubs outside the dollar system.
However, the alternative safe-haven bond markets—mainly those of Germany, Switzerland, and Japan—are significantly limited in size to accommodate the vast amount of capital presently invested in dollar-denominated assets, especially U.S. Treasury securities, which amount to $28 trillion, with approximately $8.5 trillion owned by foreign entities. The UK government bond market faces similar limitations in scale.
In Europe, the lack of a fiscal union and a secure asset similar to U.S. Treasury bonds restricts the availability of Eurobonds and undermines unity within the euro area. At the same time, China’s government bond market continues to be restricted as a refuge for reserves due to capital restrictions, incomplete currency flexibility, political secrecy, and insufficient legal safeguards.
Certainly, government and semi-governmental bonds—issued by entities such as the European Investment Bank, World Bank, Asian Development Bank, and Germany’s KfW—might attain certain levels of reserve currency status due to their dependability and support from multiple international bodies. However, this remains more of a future possibility rather than an instant remedy.
Major companies like Apple or Microsoft, which have robust financial positions, could act as near-government-like options. However, private lending involves considerable risks—particularly during periods of worldwide economic turmoil—and can’t replace government-backed liquidity. Some see Bitcoin and “digital gold” as protections against the dangers of traditional currencies, yet their extreme price fluctuations, unclear regulations, and limited capacity hinder their ability to handle large-scale reserves.
Alternative choices remain similarly restricted. Central banks, especially those from China, Russia, and Turkey, have been increasing their holdings of gold, yet the worldwide availability of gold is constrained. Although Special Drawing Rights (SDRs), which serve as the IMF’s reserve asset, might gain greater significance if confidence in the dollar diminishes, SDRs are not traded in financial markets since their liquidity is controlled centrally and subject to political debate.
Central banks’ digital currencies, like China’s e-CNY and the planned digital euro, may one day act as means for international financial flow when they become compatible and commonly used. However, this scenario seems improbable in the near future.
To put it simply, should trust in the dollar as the primary global reserve currency start to wane, the subsequent shift is expected to mirror a desperate search for security, with no genuine substitute easily accessible. This kind of turmoil might break down the current interconnected worldwide financial system into localized or block-oriented structures.
This uncertainty might worsen due to crypto markets, which function with significantly reduced supervision compared to conventional financial systems and are expected to face even fewer regulations during this U.S. government term. Many digital currencies exhibit much greater fluctuations than paper money or classic secure investments, rendering them inappropriate as a reliable means of storing wealth.
Unregulated crypto markets, especially those centered on stablecoins, present increasing system-wide dangers to U.S. Treasury markets. As stablecoins are usually tied to the dollar, their providers maintain significant reserves in short-term, easily convertible assets, mainly Treasuries and cash or similar instruments.
A significant departure from the dollar linkage or an abrupt decline in trust toward a leading stablecoin might trigger widespread selling of Treasuries to fulfill withdrawal requests — akin to a cryptocurrency bank run. This kind of sale could deplete liquidity in Treasury markets, disrupt short-term interest rates, and create ripple effects across different investment categories like home loans and company debts.
Furthermore, digital currencies—particularly stablecoins and central bank digital currencies (CBDCs)—may pose a threat to the U.S. dollar’s leadership in worldwide transactions. Should these technologies gain broad acceptance, they might shift transaction activity away from traditional dollar-centric frameworks like interbank correspondence and SWIFT. However, with insufficient unified global regulations, cryptocurrency-powered payment networks run the danger of causing divisions in regulatory supervision, making capital movements harder to track, enabling illicit activities such as money laundering and funding for terrorist operations, and limiting the capacity of developing nations to control their own economic strategies.
The increasing adoption of digital currencies in international financial transfers may heighten vulnerability to hacking attempts and technical failures. Utilizing them to bypass restrictions, conduct illegal activities, and evade taxes has begun undermining the dollar’s position within unofficial banking networks, carrying significant consequences for enforcing penalties and maintaining economic security.
The Costs of Fragmentation
With increasing trade restrictions and greater fluctuations in foreign exchange rates, financial movements, reserves, payment mechanisms, and capital markets are progressively limited to rival regional groups. Financial disintegration further hinders the ability to convert currencies, interferes with SWIFT-like communication networks, and makes regulatory cooperation more challenging. Such obstacles lead to discrepancies in exchange rates, ambiguity regarding laws, and setbacks in international transactions.
When trade and financial activities are separated into different areas of influence, investment flows based on political allegiance instead of economic principles. This leads to an inconsistent worldwide economy marked by decreased expansion, lower efficiency, and increased financing expenses—particularly affecting developing nations not aligned with major powers.
In the meantime, division limits the capacity of international organizations including the IMF, the World Bank, the World Trade Organization, and the Bank for International Settlements to ensure stability, align reactions during crises, and set common benchmarks. Consequently, greater accountability is now falling upon regional entities such as the Asian Infrastructure Investment Bank.
With nations shifting their reserves towards regional options, global liquidity may decrease while risk premiums rise. Under such conditions, conflicting groups are increasingly prone to implement self-serving strategies, such as competitive depreciation and restrictions on exports. Intensifying conflicts regarding monetary supremacy, reserve significance, and transaction mechanisms will lead to greater use of financial instruments as weapons, including penalties, limitations on capital movement, and confiscation of reserves, thereby increasing the likelihood of unrest and extended periods of economic decline.
Things get more serious. With growing geopolitical splits causing economic interconnectedness to break down, this will likely speed up the development of distinct settlement mechanisms, digital money, and local trading networks. This breakdown removes important limits on warfare, making military clashes more probable.
With such high stakes, viewing the dollar’s drop simply as the conclusion of America’s “excessive advantage” overlooks the broader narrative. The future of the U.S. currency isn’t just an issue for Americans; it affects the entire world. Should a delicate but controllable balance built on international collaboration collapse into financial fragmentation, the next few years could be marked by economic disputes and the ongoing risk of full-scale warfare.
Dennis Snower, who served as the founding president of the Global Solutions Initiative and was previously president of the Kiel Institute for the World Economy, holds a visiting professor position at University College London and is a professorial research fellow at INET Oxford. Additionally, he is a non-resident senior fellow at the Brookings Institution, an international research fellow with the Said Business School at Oxford University, and a research affiliate with the Harvard Human Flourishing Program.
Copyright: Project Syndicate, 2025.\xa0
www.project-syndicate.org
Supplied by SyndiGate Media Inc. (
Syndigate.info
).
