The U.S. dollar, for all the incessant handwringing over its imminent demise as the global reserve currency, remains clearly ensconced on its throne. But that could start to change as soon as Wednesday, with a much-watched meeting of the U.S. Federal Reserve.
The latest Dollar Dominance Monitor, compiled by the Atlantic Council, shows that the U.S. dollar still has no rival for any of the central attributes of a reserve currency: The dollar is still the most used currency in central bank reserves, still the top money used for export invoices, and still overwhelmingly dominates foreign-exchange transactions. Most international debt is still dollar-denominated, as are most sales of vital commodities such as oil.
The euro, which has auditioned to supplant the dollar since its inception a quarter century ago, remains an understudy, the second-most important global currency in all those metrics. Other potential rivals, whether the Chinese renminbi or the Japanese yen, are far from playing the role of a global reserve currency today. Even further away from challenging the dollar is any sort of “BRICS currency,” a collective currency from the disparate group of nations seeking to challenge U.S. hegemony more broadly.
The dollar remaining the reserve currency is actually very important for the United States, and not simply for prestige. It very much is an “exorbitant privilege.”
“Nobody alive remembers a time when the dollar wasn’t the global reserve currency,” said Josh Lipsky, senior director of the Geoeconomics Center at the Atlantic Council. “We can do things that other countries don’t have the luxury of doing.” Without that role, he notes, “our entire system and cheap credit would be at risk. Things would look very different.”
That’s one reason U.S. President Donald Trump, despite his preference for a cheap dollar to boost exports and ease trade deficits, has also sought to beat off all challengers. Earlier this year, Trump again threatened steep tariffs on any countries inside the BRICS grouping that sought to create a global alternative that could challenge the dollar, an aspiration the China-led group talks about often but which has gone, in that guise, nowhere yet.
But ironically, Trump’s own economic policies threaten to accelerate the erosion of the U.S. dollar’s centrality and appeal. One issue is his explosion of the U.S. budget deficit, which requires bigger infusions of debt financed by overseas buyers, even if initial plans to force international creditors to accept long-term, zero-yield debt (“the Mar-a-Lago accord”) came to naught. His expansion of tariffs on friends and foes alike have started to recast global trade flows and lessened the appeal of the U.S. market. Add to that Trump’s efforts to undermine the independence of the U.S. central bank—the Federal Reserve.
“When you have the world’s reserve currency, you have to do a lot to put that under threat—no one thing can do it,” Lipsky said. “But challenging central bank independence, the debt crisis, the geopolitical crises…these are the kinds of things that, together, can kick out the legs of the stool.”
One leg that will be under special scrutiny Wednesday is the regular meeting of the Federal Reserve, the first since Trump unsuccessfully sought to fire one Fed governor he did not like while successfully installing one who works at the White House. Those moves have stoked concern among investors (and other central bankers) about the true independence of the world’s most important central bank.
And while a modest 0.25 percent cut in interest rates is all but guaranteed to be announced after Wednesday’s meeting—it was already well-flagged by Federal Reserve Chairman Jerome Powell late last month—and is all but priced into the market, there remain plenty of fears that politics, not economic conditions, are calling the shots. A half-point cut this month, for instance, would likely spark more panic than market glee.
There are arguments, such as those that Powell made, that the slowing labor market makes a rate cut necessary, even though plenty of economists argue that stubborn inflation actually suggests the correct move would be to stand pat or even raise interest rates, not cut them at a time of rising prices. But the fact that Trump has berated Powell and the wider Fed to cut rates sharply to turbocharge economic growth for him creates the impression that the nominally central bank may start taking direction from the White House as additional interest-rate decisions come in the next few months.
That was reinforced this week with the confirmation of White House Economic Council Chair Stephen Miran, the author of the Mar-a-Lago dollar plan, as a Fed governor with a say in interest-rate decisions. In a first, he will keep working for the administration while serving at the Fed. Trump this week again pressured the Fed to cut interest rates deeper and faster than the Federal Reserve has so far indicated is prudent, and so the key on Wednesday will be the guidance that the Federal Reserve gives about future interest-rate cuts.
But the dollar’s other challenge, even if nascent at this point, comes from emerging and developing markets, including countries in BRICS and those that have been on the receiving end of U.S. sanctions and tariffs. Russia, China, and others have all sought not only to increase the use of their own currencies in cross-border trade, but also to develop indigenous financial settlement systems that can sidestep the dollar’s central role as gatekeeper of the world’s financial flows. Those initiatives—from mBridge to China’s CIPS to Russia’s SPSF—won’t dethrone the dollar yet. But they are laying the groundwork.
“Alternative financial plumbing is spreading rapidly and doesn’t use the dollar,” said Lipsky. “So the question becomes: Can something driven ultimately by a way to evade sanctions become a long-term challenge to the dollar?”
In the meantime, the simple shifting dynamics of greater economic ties between emerging-market economies are leading to a shift away from reliance on the dollar. Brazil, which has already taken much of the Chinese soybean market away from the United States thanks to Trump’s tariffs, is also increasingly doing so in non-dollar currencies, thanks to deeper and formal financial ties between Brasília and Beijing. Last week, China and Indonesia signed an even deeper currency cooperation agreement. The list is long.
“There is definitely more use of local currencies within intra-BRICS trade,” said Lauren Johnston, of the AustChina Institute in Melbourne, Australia. Johnston has worked for years on international monetary reform and most recently dug into the evolving monetary and transaction landscape, especially among BRICS members.
What all the new alternative channels, whether currency or technology-anchored, make clear is that one of the pillars of the dollars’ centrality—namely the sheer need for its use to take care of most cross-border business in most places—is slowly being whittled away.
“That doesn’t explicitly equate with replacing the value of the reserve role of the dollar today, or its role as a trusted means of storing wealth, but it may readily diminish the share of trade happening in dollars, and diminish the need for it,” Johnston said.
Those technical advances are combining with geopolitical and geoeconomic shocks, from a broad use of U.S. sanctions to a willy-nilly application of tariffs, state intervention, and extra-territorial demands regarding regulation and taxation, to push more and more countries away from the dollar, Lipsky said, even if they can’t replace it quite yet.
“For a long time, countries both wanted and needed to be part of the dollar system. Now, many need to, but don’t necessarily want to, and that to me is a big difference.”
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