The World Seeks a Way Out of Dollar Dependence

For more than seven decades, the U.S. dollar has held the central position in the global economy. About 90% of all foreign exchange transactions involve it; 74% of trades in Asia and 96% in the Americas are conducted in dollars. It accounts for 58% of central bank reserves outside the United States, and private investors worldwide favor dollar-denominated assets.

This dominance gives the United States significant advantages—it reduces price volatility in trade, allows it to borrow on a massive scale and at low interest rates, and serves as a tool of sanctions power. As economist Kenneth Rogoff writes in his book “Our Dollar, Your Problem,” displacing a dominant currency is extraordinarily difficult: inertia and the resilience of U.S. institutions work in the dollar’s favor. Yet, he warns, the peak of dollar power may already have passed, and Washington must act carefully to avoid losing its privileged position.

For decades, U.S. administrations built confidence in the dollar by maintaining the independence of the Federal Reserve and honoring the country’s international commitments. The administration of Donald Trump, by contrast, is eroding those foundations—expanding presidential authority, interfering in the work of the Fed and statistical agencies, and casting doubt on America’s obligations to its allies. This is especially risky in light of the massive spending bill passed over the summer: it could drive the national debt to record levels, even as the dollar remains central to the stability of U.S. borrowing.

Using the dollar spares countries from having to hold reserves in dozens of currencies—making it as universal as English in international communication. Efforts to diversify reserves come with major costs, as they would require managing a multitude of currency risks.

After the creation of the eurozone in 1999, the dollar’s share of global reserves fell from 71% to 58%, while the euro has held around 20%. But, Rogoff notes, replacing the dollar will be difficult until the euro bond market achieves sufficient liquidity—something that would require the EU to overcome political barriers to issuing joint debt instruments.

China and Russia, since 2022, have also sought to reduce their dependence on the dollar. The United States and its allies restricted Russian banks’ access to international settlements and froze assets, prompting Beijing to promote yuan-based payments and digital currencies. Yet, Rogoff emphasizes, the internationalization of the yuan cannot happen without financial liberalization and the expansion of its bond market—only then will foreign investors have confidence in the liquidity of its assets.

A currency that holds global leadership brings the United States an “exorbitant privilege,” as Valéry Giscard d’Estaing put it in the 1960s. Washington can borrow abroad and repay its debts in its own currency, shifting exchange-rate risks onto others. This reduces price volatility and gives the U.S. transparency and control over cross-border payments. In addition, the country holds enough voting power to block decisions in the World Bank and the IMF.

Dollar dominance allows the U.S. to borrow vast sums at lower interest rates than most countries. Investors pay a “convenience premium” for the safety and liquidity of Treasury securities. According to Rogoff’s estimates, low borrowing costs save the U.S. up to $140 billion a year on external debt and as much as $600 billion including domestic borrowing. In times of crisis—such as in 2008 and during the pandemic—demand for dollars rises, allowing the government to finance emergency measures without losing market confidence.

But hegemony carries costs. Maintaining superpower status requires enormous military spending. A stronger dollar can also undermine U.S. industrial competitiveness. In the early 2000s, Beijing pegged the yuan to the dollar amid a surge in exports, inflicting long-term damage on U.S. manufacturing regions. Yet Rogoff stresses that the fault lies not with the dollar system itself, but with Chinese policy and Washington’s failure to respond.

Dollar leadership rests on trust in American institutions—the independence of the Federal Reserve, the rule of law, and predictable policymaking. These factors have long underpinned the currency’s stability and investors’ confidence. But Rogoff’s book ends with the 2024 election and does not account for actions taken during Trump’s second term that could undermine those foundations.

One of them was the sharp increase in import tariffs—to 17%, nearly eight times higher than last year’s level. Even U.S. allies, including the United Kingdom, were subject to the duties. Treasury Secretary Scott Bessent promised “hundreds of billions of dollars in revenue” for the budget, but legal experts noted that the mass imposition of tariffs exceeds presidential authority and undermines Congress’s constitutional right to levy taxes. This, together with the disregard for international agreements, has weakened confidence in America’s commitments—the cornerstone of the dollar system.

Equally dangerous are the attacks on the Fed’s independence. For investors to keep buying low-yield Treasury bonds, they must trust that the central bank will protect them from inflation. Trump, however, demanded lower interest rates to reduce debt-servicing costs: “Powell could save nearly a trillion with a single stroke of the pen,” he said. Such statements—and attempts to fire the Fed chair—raise doubts about the bank’s autonomy and could push bond yields higher.

After a report showing weak job growth, the president dismissed the Senate-confirmed head of the Bureau of Labor Statistics. Actions like these erode trust in official data—even though investors rely on those very figures to gauge the health of the U.S. economy.

The new spending law adds more than $4 trillion to the national debt over the next decade. Today, the debt is already nearing 100% of GDP, and the cost of servicing it is rising. If the dollar weakens at the same time, America’s fiscal capacity will narrow, and the economy will suffer lasting damage.

Financial markets reacted sharply to the tariffs and interference in the Fed’s work: bond yields surged and the dollar weakened. The White House partially backed down afterward—on April 9, Trump suspended the tariffs, and on April 22, he announced he had “no intention of firing” Powell. But the reputational damage was done: investors saw that the administration was willing to disregard rules for political ends.

Counting on the weakness of alternatives to keep the dollar in the lead is a dangerous illusion. Its share of global reserves has already fallen by more than ten percentage points since 2000, and financial technology is creating an expanding array of alternative payment systems.

Preserving the dollar’s privileged status is now a vital task. Growing deficits require low borrowing costs, and U.S. sanctions policy depends on the global role of its currency. If the administration continues to undermine institutional independence and confidence in America’s commitments, dollar dominance could weaken. And as Rogoff warns, it is Americans themselves who will bear the cost.