The dollar's pre-eminence in the global economy, measured by central-bank reserve holdings, trade-invoicing currency, the denomination of international borrowing and, perhaps most usefully, which currency central banks use as their exchange-rate anchor or reference currency. By this last measure, dollar dominance peaked around 2015.
China gradually began making its currency more flexible after 2015, loosening its peg to the dollar. Because a large economy like China's can experience very different business cycles from America's, there is no reason for its central bank to dance to the Federal Reserve's tune. American sanctions on Russia, including the freezing of over $300bn-worth of central-bank reserves, accelerated China's efforts to decouple from the dollar, given the likelihood of an eventual reckoning over Taiwan.
As China's exchange-rate regime has evolved, so have those of its neighbours, since China is at least as important a trading partner as America for most of them. Asia constitutes roughly half of the dollar bloc—economies that focus on the dollar when managing their own currency's exchange rates—so a gradual splintering is under way.
The European Central Bank's moves to establish a central-bank digital currency should be viewed in part as an effort to compete more effectively with the dollar. Christine Lagarde, the ECB's president, has been at the forefront of this push.
America's unsustainable debt trajectory is among the biggest challenges to dollar dominance, compounded by the ending of a period of very low long-term real interest rates. Reduced market share for the dollar would mean higher interest rates on long-term dollar debt and a weakening of the effectiveness of American financial sanctions.
America's net international investment position (NIIP)—the difference between assets Americans own overseas and those foreigners own in America—has fallen to -90% of GDP, by far the lowest of any big, rich economy. For years America earned more on its overseas assets than it paid out to foreign investors, because foreigners held low-yielding debt while Americans held more stocks and FDI. But in the third quarter of 2024 America paid more to owners of its assets than it earned on foreign investments for the first time this century. Foreigners collectively own $62trn-worth of American assets (including derivatives), compared with only $36trn owned abroad by Americans. One third of America's government debt, amounting to $9trn, is held by foreigners. American stocks account for about 60% of global equities by value, and the dollar is the world's reserve asset. No advanced economy has sustained a foreign-liability position as negative as America's.
Under "Section 899" in the Republican budget bill moving through Congress in mid-2025, the treasury secretary would gain the power to tax interest, dividends and rent flowing to foreigners in countries with tax systems the law defines as "unfair". The rate would start at 5% but could rise as high as 20%. A separate clause would tax at 3.5% money sent out of the country by any non-citizen. America's economy does not depend heavily on trade—which as a share of GDP is less than half the rich-world average—but it is unusually reliant on foreign investment.
The increasing willingness of both Democrats and Republicans to challenge the Federal Reserve's independence also threatens the dollar's standing. Donald Trump has attacked the Fed, wanting to blame it for any recession his tariffs might cause.
Since Donald Trump's inauguration, the dollar has fallen by around 12% against a basket of other currencies, sliding to its softest in almost four years by late January 2026. Despite insistence from Scott Bessent, the treasury secretary, that America has a "strong-dollar policy", Trump appears to believe a weaker dollar will boost exports. In April 2025 tariff announcements prompted investors to shed American assets, sending Treasury yields soaring and the dollar plummeting simultaneously—a pattern usually seen in emerging markets and in Britain's gilt-market crisis of 2022. Despite the dollar's weakness, the real exchange rate (which accounts for differences in inflation between countries) remains 13% above its 30-year average. Using the Big Mac index, the dollar is overvalued against 49 of 70 currencies. Research published by the Bank for International Settlements in June 2025 suggests that many foreign investors scrambled to hedge their currency exposure after Trump's tariff broadside in April, contributing to dollar weakness through foreign-exchange swaps rather than outright selling of American assets. Gold has surged to over $5,500 an ounce, with the "debasement trade"—bets on the deterioration of American financial exceptionalism—gaining adherents on trading floors.
Albert Hirschman invented what became the most famous measure of market concentration in 1945—not to study firms, but to measure the economic power wielded by countries. His index appeared in a book examining trade as a source of "political pressure and leverage", inspired by Hitler's Germany exerting influence over its neighbours through the gravitational pull of its economy. Hirschman rejected the naive belief that because trade is voluntary and mutually beneficial, it is geopolitically innocuous. His book was largely forgotten by the economics profession until recently; political scientists now account for most of its citations.
Christopher Clayton of Yale, Matteo Maggiori of Stanford and Jesse Schreger of Columbia have sought to revive and extend Hirschman's work using modern economic tools, in a field they call "geoeconomics" (borrowing a term coined by Edward Luttwak, a historian and military strategist, in 1990). Their models show that economic power does not grow in a straight line: it shoots up as a hegemon's market share nears 100%. An increase in market share from 80% to 90% makes a 500 percentage-point difference in how much alternative providers would need to expand to replace the hegemon. Even small efforts to decouple from an abrasive hegemon can diminish its power by a surprising degree. Currencies like China's yuan can defang the dollar even if they never dethrone it: going from 1% of the market to 10% in small and medium-size countries can reduce American financial power as much as going from 10% to 50%. By the same logic, adding a country like Singapore to a financial coalition yields disproportionate gains when the coalition's market share is already large.
A hegemon might promise not to exploit its power too much—for example, by submitting to international trade rules that cap tariffs—in order to dissuade countries from insulating themselves. In this framework, trade rules emerge not from "globalist" planning but as enlightened self-interest on the part of a hegemon: the nationalist case for multilateralism.
China settled over 30% of its current-account transactions (including trade in goods and services) in yuan in the first half of 2025, up from 15% in the whole of 2019. China's cabinet is considering a "roadmap" to boost the currency's usage overseas, which may include yuan-backed stablecoins. At a summit of the Shanghai Co-operation Organisation in September 2025 its ten members, including China, India and Russia, promised to settle a greater share of transactions in local currencies.
Though China is responsible for nearly a fifth of global economic activity, the yuan is used in only 4% of international payments by value (compared with 50% for the dollar). Yuan assets make up just 2% of global central-bank currency reserves (compared with 58% for dollar assets). But the yuan's modest share of international payments has doubled since 2022. China now settles more than 50% of its total cross-border receipts (including financial flows) in yuan, up from less than 1% in 2010. In May 2025 regulators told big banks that no less than 40% of trade-facilitation lending should be done in yuan. After sanctions were imposed on Russia in 2022, Chinese banks switched nearly all of their new overseas lending out of dollars and into yuan, tripling the stock of outstanding yuan debt. China has extended 4.5trn yuan ($630bn) in swap lines to 32 central banks, creating a global financial safety net rivalling the scale of the IMF's; only a fraction has been drawn on.
China has built Cross-Border Interbank Payment System (CIPS), which bears similarities to SWIFT, the West's bank-messaging system. Since Chinese banks can and do transact outside SWIFT, the yuan's role in international payments is probably undercounted. More than 1,700 banks have signed up to CIPS across the globe, up by a third since before the war in Ukraine. Transaction volumes rose by 43% in 2024 to 175trn yuan ($24trn). Clearing banks to settle yuan payments have been set up in 33 markets; China began working with the United Arab Emirates in June 2025 to expand the CIPS network into north Africa and the Middle East.
Several billion dollars have been transacted over mBridge, a digital-currency network built by China with other central banks. In August 2025 a firm in Xinjiang, a region where entities are under sanction for using forced labour, used mBridge to pay its foreign shareholders.
Firms, including foreign ones, are on track to issue a record amount of "dim sum" yuan bonds (yuan-denominated bonds issued offshore). In July 2025 Hungary issued about 5bn yuan in "panda bonds" (yuan-denominated bonds issued onshore by a foreign borrower), the largest single sovereign issuance to date. Russian energy firms have been given the go-ahead to issue yuan-denominated paper. Kenya may swap the dollar debts it owes to China into yuan. Pan Gongsheng, China's central-bank governor, declared in a speech in June 2025 that the global financial system was becoming "multipolar" and that the dollar would be forced to compete with other currencies, including the yuan.
The yuan and the euro are encroaching on the dollar in the legal economy. Cryptocurrencies are doing the same in the underground economy, which is roughly a fifth of global GDP.
Charles Kindleberger, an economic historian at MIT, argued in "The World in Depression" (1973) that the Great Depression was so severe because the global economy lacked a leading nation to stabilise it. "Britain could not and America would not," he wrote. The "Kindleberger gap" refers to this void of economic leadership. Stability, in his view, is a global public good, not a naturally occurring equilibrium; the leading economy must provide an open market for goods, countercyclical finance and the role of lender of last resort.
Kindleberger had a front-row seat for the Depression. As a graduate student in the 1930s he worked at the US Treasury for Harry Dexter White, chief architect of the post-first-world-war system of fixed exchange rates, then moved to the New York Federal Reserve. After the second world war he helped shape the Marshall Plan at the State Department before joining MIT as one of the first members of its economics department.
Hélène Rey of the London Business School has identified a "New Kindleberger Gap" in which a "self-destructing hegemon" is uninterested in providing global public goods while an ascendant one (the EU or China) lacks the ability. At the heart of her concern are the Fed's swap lines, which offer central banks in allied countries access to dollars in exchange for their own currency to forestall crises. These are just the sort of burden-sharing to which Donald Trump normally objects. Jerome Powell, the Fed chairman, has defended them in Trumpian terms: "The reason we do it is it's really good for US consumers."
Rey has suggested European central banks should encourage commercial lenders to reduce exposure to dollar assets, build up precautionary dollar reserves and help turn the euro into an international currency. Robert McCauley of Boston University has proposed a "dollar coalition of the willing": the central banks that would normally receive swap lines from America already hold $1.9trn in dollar-reserve assets, which they could agree to pool in advance of a crisis—far more than they borrowed from the Fed during either the 2007-09 financial crisis or the early stages of the covid-19 pandemic.
The dollar has beaten back one challenger after another—the Soviet Union, Japan, the euro zone, and now perhaps China and crypto—but America has had several turns of luck along the way. These include the collapse of mid-1960s Soviet economic reforms, Japan's mistake in allowing itself to be browbeaten in the 1985 Plaza Accord when its monetary-policy framework and financial regulators were not yet ready, and the euro zone's decision to prematurely include Greece.
The greenback's primacy already reduces the returns foreigners demand to invest in America by 1-2 percentage points per year, an advantage known as the "exorbitant privilege". The Trump administration has hailed dollar stablecoins—a kind of cryptocurrency designed to maintain a stable value, each coin backed by a dollar-based safe asset—as an opportunity to expand the dollar's realm. The White House has weighed whether to encourage other countries to switch to the greenback, going beyond the typical candidates such as Argentina. Officials at the Bank of England and the ECB have warned of the dangers of digital dollarisation.
Both Ecuador and El Salvador, which are dollarised, have enjoyed low inflation even when led by populist left-wingers. However, dollarised economies import the Federal Reserve's monetary policy rather than setting their own, making it harder to fight recessions. Because they cannot create money, it is more difficult to support the financial system during a crisis.
"Indecision is the basis of flexibility"