undermine domestic economic health and global stability. The continuous inflow of foreign capital— seeking dollar-denominated assets— can inflate asset prices and distort credit markets. This often results in financial bubbles and unsustainable debt accumulation across both public and private sectors. Moreover, the fiscal space afforded by low borrowing costs may reduce the urgency for structural reforms, enabling political leaders to postpone difficult decisions on entitlement reform, tax policy or spending discipline. These dynamics can provoke political backlash: the concentrated gains of reserve currency status— seen in financial centers and multinational firms— are often not felt by working-class communities, fueling populism and skepticism toward the considerable benefits of global trade. Finally, reliance on the dollar’ s dominance to impose financial sanctions or exercise geopolitical influence carries its own risks. Overuse of this“ weaponized finance” can incentivize rival states— and even disaffected allies— to develop alternative financial systems, accelerate de-dollarization and gradually fragment the international monetary order
Contemporary Challenges and De-dollarization
Since the early 2000s, the US dollar’ s share of official foreign exchange reserves has declined from over 70 % to below 59 %, signaling a gradual erosion in its dominance of the global financial system. While the dollar remains the primary reserve asset, this trend reflects a growing desire among nations to reduce their dependence on a single monetary hegemon. Several structural and geopolitical factors have accelerated this shift. US sanctions on countries such as Russia and Iran have motivated targeted nations to build alternative financial infrastructure, including Russia’ s SPFS and China’ s Cross-Border Interbank Payment System( CIPS), to circumvent dollar-based settlement networks. A growing number of countries— including China, India and Russia— are increasingly conducting bilateral trade in their own
Five British pounds, dated 1839.
national currencies, reducing the dollar’ s role in invoicing and settlement.
Central banks, especially in emerging markets, have stepped up gold purchases as a means of hedging against dollar volatility and geopolitical risk, diversifying away from US assets. The growing exploration and development of central bank digital currencies( CBDCs) may, in time, allow cross-border payments to bypass the traditional dollar clearing system altogether. Technological advances in decentralized finance— ranging from blockchain platforms to private cryptocurrencies— present a long-term challenge to dollar primacy by offering alternative channels for capital flow, even if such tools remain on the periphery of mainstream finance for now.
No challenger presently has the scale, credibility or institutional robustness to fully replace the dollar in the short term. But the long-term trend points to greater multipolarity and increasing incentives for diversification.
The Future of Reserve Currency Leadership
What would a transition away from dollar dominance look like? Most likely, it would not involve a sudden collapse but a gradual diffusion of financial power. A more plausible future would involve a setting in which the dollar remains dominant but is accompanied by a rising share of euros, renminbi and other currencies. Gold and digital assets may also play a supporting role in a more diversified global reserve architecture.
If the US role as the issuer of the world’ s reserve currency is to be maintained, the key challenge for the United States is to manage its domestic affairs— particularly its fiscal path, monetary policy and institutional credibility— in a way that fosters global trust. Reserve currency status is not a birthright. It is earned and re-earned generation by generation, policy by policy and transaction by transaction. If the US fails to live within its means or abuses its financial power, a shift may become not only possible, but inevitable.
Global reserve currencies reflect the distribution of economic power and institutional strength at a given moment in history. The US dollar remains at the center of global finance due to its unmatched liquidity, deep markets and institutional trust. But history shows that no reserve currency lasts forever. The Dutch guilder and British pound were displaced not through sudden shocks, but through long processes of relative decline.
The United States today stands at a crossroads. Americans enjoy profound advantages from issuing the world’ s reserve currency but must now grapple with the structural imbalances and political strains imposed by that role. As global power disperses and alternative systems evolve, the durability of dollar dominance will depend not only on America’ s external rivals— but on our own internal discipline, reforms and capacity for renewal.
Dr. Peter C. Earle is the director of economics and economic freedom and a senior research fellow at the American Institute for Economic Research( AIER). His research focuses on financial markets, financial market history, monetary policy, cryptocurrencies, the economics of games and problems in economic measurement. He has been a member of the Financial History editorial board since 2022.
www. MoAF. org | Summer 2025 | FINANCIAL HISTORY 15