That misses the real story behind the dollar’s slide to its lowest value in almost four years—and a more than 10 percent decline since US President Donald Trump’s inauguration. As The Economist argues this week: The world isn’t selling America, it’s hedging it.

If global investors were abandoning the United States, then you would see capital flight, surging Treasury yields, and a scramble for alternative safe havens. Perhaps the clearest indication of that has been the price of gold increasing by more than 25 percent so far this year.

Writes The Economist, with a nod to gold buyers: “Trading floors are abuzz with talk of the ‘debasement trade,’ a broad term for bets on the deterioration of American financial exceptionalism. If the debasement traders are right, then the sell-off in the greenback has barely begun.”

Yet even as the dollar has declined, US stocks have remained strong. The S&P 500, for example, has risen by 15 percent in the past year, briefly hitting an all-time high earlier this week. The yield on the United States’ ten-year Treasury bonds is lower than when Trump began his second term, which is a sign of enduring demand. The dollar could further decline if Trump’s just-announced nominee for Federal Reserve chair—Kevin Warsh—cuts interest rates as the president desires, but there’s no guarantee that Warsh will do so. “It’s still early and there’s no need for alarmism, as any other competitor is light-years behind the dollar,” says Josh Lipsky, the Atlantic Council’s chair of international economics. “But these trends didn’t appear overnight.”

The Atlantic Council’s GeoEconomics Center, which Lipsky leads, has been tracking these shifts for the past three years with its Dollar Dominance Monitor. The data show that the “hedge America” trade, while accelerating in recent months, is not new. In fact, the first demand signal predates Trump and has its roots in the search for alternative payment systems to work around sanctions. Interest in de-dollarization picked up, for example, after the Group of Seven (G7) sanctions response to Russia’s invasion of Ukraine. “What’s new in the past year is that the movement is growing beyond payments and now into currency trading and even the bond market,” says Lipsky.

Dollar Dominance Monitor

This monitor analyzes the strength of the dollar relative to other major currencies. The project presents interactive indicators to track BRICS and China’s progress in developing an alternative financial infrastructure.

Robin Brooks of the Brookings Institution points to “policy chaos” as a driver of the dollar’s fall, most recently including Trump’s threat to “buy” Greenland, which he backed off of in Davos last week. “In a nutshell,” writes Keith Johnson in Foreign Policy, “in much the same way that countries are hedging their geopolitical exposure to the United States—such as the EU and India inking a historic trade and defense deal as part of a quest for new partners in an uncertain world—foreigners are hedging their bets against too much exposure to the dollar.” 

Last July, I issued “an Independence Day warning about the US dollar” in this space, writing, “For decades, the world chose the dollar without thinking about it all that much, and that was not only because of unrivaled American economic strength. Most of the world’s major economic players also trusted the United States’ financial leadership—its rule of law, its institutions, its predictability.” 

That trust is what’s eroding. Part of the problem in recent days has been that Trump has crowed that the dollar’s fall is “great,” making US products cheaper on global markets. These comments stirred rumors about a US scheme to weaken the greenback, which Treasury Secretary Scott Bessent dispelled by reinforcing the country’s strong dollar policy.

The Economist warns that “‘hedge America’ may eventually turn into full-blown ‘sell America.’ If Mr. Trump keeps undermining the credibility of America’s financial system, that moment could come sooner.” Though I still side with those who argue that it’s never been smart to bet against the US economy, it’s concerning that a growing number of traders and allies are deciding that it’s prudent to hedge.  

Frederick Kempe is president and chief executive officer of the Atlantic Council. You can follow him on X @FredKempe.

This edition is part of Frederick Kempe’s Inflection Points newsletter, a column of dispatches from a world in transition. To receive this newsletter throughout the week, sign up here.

The post Markets and allies aren’t ‘selling’ America. They’re ‘hedging’ it. appeared first on Atlantic Council.

There’s a high level of interest in what happens next. The US Justice Department is undertaking a criminal investigation into Federal Reserve Chair Jerome Powell, following a year of sparring between Powell and US President Donald Trump over interest rates. On Sunday night, Powell went public with his response to “this unprecedented action.” He called questions about the costs of the Fed’s headquarters renovation and Powell’s testimony to Congress “pretexts” for the administration’s ongoing pressure campaign. “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president,” he said. 

How will these developments affect US and global markets, and what future actions should we expect from the White House and the Fed? We turned to our chair of international economics to make sense of it all.

• Josh Lipsky (@joshualipsky): Chair of international economics at the Atlantic Council, senior director of the GeoEconomics Center, and former International Monetary Fund advisor  

The backstory

• The clash between president and Fed chair “was a shocking escalation,” Josh tells us. “Until now, Powell had done everything possible to avoid an outright confrontation. That is what made his comments last night so powerful.” 
• Trump would prefer lower interest rates to boost consumer spending, but the Powell-led Fed, Josh says, has “remained cautious [about reducing rates], wary of sticky inflation and the potential inflationary impact of tariffs.” 
• “What is particularly surprising is the timing” of the Powell probe, Josh says, since his term as chairman expires in May, and the Fed has been cutting rates gradually in recent months.  
• “Without having to fire the Fed chair, Trump was already getting the policy outcome he wanted—and would soon have the opportunity to appoint a new ally,” Josh tells us. Still, he predicts that neither the White House nor the Fed will back down. 

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The markets

• On Monday, US and global markets were basically flat. Josh thinks this is likely due to the relatively limited economic fallout from Trump’s “Liberation Day” tariffs and other major events such as the US strike on Iran’s nuclear facilities.  
• “Markets are choosing to wait and see rather than overreact, and they have data from Trump’s first year that suggests this strategy has worked,” he explains. 
• But Josh says this dynamic “creates a strange tension: Markets believe they can constrain the president through negative reactions, and therefore often don’t react [to Trump’s economic actions]—while the president, seeing little immediate financial cost, believes he can continue to push forward.” 

The fallout

• Since Sunday’s announcement, two US Senate Republicans have pledged to block Trump’s Fed nominees until the case is resolved. Josh predicts it will be hard to confirm a new chair while the case is pending, so it’s possible Powell could continue as temporary chair past his scheduled departure—not the result Trump desires. 
• While all this drama is unfolding, the US Supreme Court will hear arguments this week on the case of Trump’s attempted firing of Fed governor Lisa Cook over allegations of mortgage fraud. And as soon as Wednesday, the court will decide the fate of many of Trump’s tariffs, potentially putting the president at odds with the Fed and the high court at the same time. 
• “Even Wall Street will not be able to ignore” the impact of a Supreme Court tariff decision, Josh tells us. “While markets are hoping that year two looks like year one, Trump is signaling—from Venezuela to the Federal Reserve—that this time is different.” 
• Global central bankers and finance ministers are watching with concern, Josh reports, given the Fed’s role as a “global model of an independent central bank” that makes decisions for the sake of economic health rather than as a result of political pressure.  
• “This is not academic,” Josh says. The Fed “has repeatedly stabilized both the US and global economy in moments of crisis,” and “independent central banks are proven to deliver stronger growth, more jobs, and better economic outcomes. Trillions of dollars and millions of jobs are at stake.” 

The post How will the Trump-Powell clash shake the global economy?  appeared first on Atlantic Council.

Few national monies have what it takes to reach international reserve currency status. Markets are picky, only elevating currencies with stable values and issued by states with broad international transactional networks and large, open financial markets. The role of politics in shaping the global currency hierarchy is seen as secondary to these baseline economic fundamentals. That is changing as the second Donald Trump administration has thrust politics to the fore of a renewed discussion about the dollar’s reserve currency status. In the great global currency debate, market forces have never been more passé and political forces have never been so prominent. As the Trump administration’s foreign policy upends the liberal international order (LIO) upon which dollar dominance is built, questions are being raised about the future of the dollar and the potential for change in the international currency system—and rightly so. As realist scholar Robert Gilpin argued, “Every international monetary regime rests on a particular political order.” With the survival of the LIO now in question, Gilpin’s thesis is being tested in real time. Dollar dominance is as much a political phenomenon as a market-driven one. It reflects a set of ideas about what it means to be the reserve currency issuer, as well as a series of policy choices that enabled and fostered the dollar’s international use. If ideas and policy choices change, the status quo monetary equilibrium will destabilize. Today, the Trump White House appears to be breaking from the long-standing postwar view that the dollar’s reserve currency status is in the US interest. This position shift reflects a contrarian perspective that blames the dollar’s reserve role for large US trade deficits and industrial decline. Consequently, the administration is embracing an unorthodox economic policy path to undo these alleged harms. As uncertainty about the United States’ political commitment to the dollar’s reserve role grows under this administration, the currency’s appeal will diminish.

International security dynamics are also stoking change. US allies are incentivized to hold dollars due to security considerations. Moreover, so long as they depend on Washington for protection, their own currencies are less likely to emerge as rivals to the dollar. Trump views US allies as free riders who have taken advantage of the United States by enjoying military protection without paying for it, leading him to openly question the NATO Alliance. If the United States casts aside its security responsibilities in Europe and elsewhere, former military dependencies will pursue self-help security strategies. A more independent Europe that finances a large and fast-growing military budget through joint debt issuances could put the euro on a path toward being the dollar’s rival, which some predicted it could become a quarter century ago.

The dollar’s rise, enshrinement, and reign as the world’s indispensable currency coincided with an unprecedented era of global economic integration and international institution building. As US power has waned in the twenty-first century, its currency power has remained steady. Indeed, dollar dominance might be the most durable feature of the aging US-led postwar international order. Predicting its demise has been a foolhardy enterprise for more than half a century. This time could be no different, but there are reasons to think it might be. For all the economic tumult that the dollar has faced and endured over the last eighty years, its political foundations have remained steadfast—until now. As the political order on which the dollar system rests grows creaky, dollar preeminence is also looking wobbly.

The reserve currency role as policy choice

Political economist Jeffry A. Frieden’s opus Global Capitalism, a sweeping historical account of economic globalization in the twentieth century, presents us with a seven-word thesis: “Globalization is . . . a choice, not a fact.” Frieden’s pithy point is that global markets do not develop in a political vacuum; rather, they are the product of politics, of government policy choices that remove barriers to economic integration. The political base upon which markets are built is easy to ignore, especially during times of openness and cooperation. However, when things begin to fall apart, the weight of politics and policy becomes impossible to miss.

Extending Frieden’s thesis, it is also true that issuing the world’s reserve currency is a choice, not a fact. US economist Peter B. Kenen wrote more than fifty years ago that the United States“allowed other countries to attach [reserve currency] status to the dollar.” That is, US policy choices enabled market actors to elevate the dollar to its global currency status.

Decades of US political leadership supported the dollar’s reserve currency role largely for one reason—it was believed to be in the US national interest. Because the world’s investors want to hold dollars, the US government, as well as US businesses, can tap global capital markets for a seemingly limitless supply of low-cost financing. To overly simplify it, being the reserve currency issuer is akin to having a credit card with an unusually high borrowing limit and the lowest interest rates available. This gives the United States unparalleled macroeconomic flexibility, allowing Washington to keep taxes low while spending more freely on priorities like national defense than it could if its currency were not so special. This is why, in the late 1960s, France’s finance minister infamously labeled the dollar’s reserve status an “exorbitant privilege”; it uniquely allowed the United States to practice fiscal profligacy without being disciplined by markets.

Given the perceived benefits of issuing the world’s reserve currency, preserving dollar preeminence has been a mainstay of presidential administrations going back decades. The proof is in the policy. For example, successive administrations have espoused the United States’ commitment to a “strong dollar,” aimed at ensuring that dollar assets maintain their long-term appeal to foreign investors. Since fully deregulating its capital markets after the Bretton Woods system collapsed, the United States has maintained an open-door investment policy, making it an attractive destination for foreign capital. As a borrower, the US government has earned a sterling reputation by never defaulting on its bonds, which is a central reason why US Treasuries are viewed as safe assets. During the most extreme moments of global financial distress, the Federal Reserve has repeatedly acted as the lender of last resort to the global economy, making its currency available to jurisdictions where panic had made dollar funding scarce. The political independence of the Federal Reserve, while occasionally tested by presidents, has been respected and protected, signaling competent, technocratic management of the dollar.

None of this happened by accident. To return to Frieden’s thesis, the United States has chosen, time and again, to take on the role and responsibility of issuing the world’s reserve currency. Now, as the United States’ commitment to the LIO appears to be fading, its commitment to the dollar’s reserve role might also be slipping away.

From privilege to burden

What happens if US policymakers change their minds? How might US policy evolve if Washington no longer views issuing the reserve currency as a net positive for the United States and something worth preserving? We are beginning to get answers to these questions as the Trump administration breaks with decades of dollar policy orthodoxy.

At the heart of this apparent position shift is a contrarian view of the dollar, associated with the ideas of Michael Pettis, which portrays the reserve currency role as a burden rather than a privilege. As the primary provider of the global safe asset, the argument goes, the US financial system absorbs massive amounts of foreign capital each year. As foreign central banks and private investors buy dollars to scoop up safe, highly liquid US Treasury bonds, the dollar’s value increases while corresponding foreign currency values are depressed. As a result of the strong dollar, US-made goods are uncompetitive globally, depressing exports, while foreign goods are inexpensive in US markets, stimulating imports. The net effect is a large and persistent current account trade deficit that harms US producers and shrinks US industrial capacity.

This perspective has gained a foothold within the Trump White House. In a 2023 public hearing with Federal Reserve Chair Jerome Powell, then Senator JD Vance suggested that reserve currency status amounts to “a massive tax on American producers” and linked it to a “hollowed out industrial base.” Stephen Miran, who served as the president’s top economic advisor prior to joining the Federal Reserve Board of Governors earlier this month, published a paper last year detailing policy steps the Trump administration might take to offload some of the reserve currency burden onto other countries.

For Miran, the objective is clear: to rebalance US trade with the world through dollar devaluation and bring down long-term US debt service costs in the process. He meticulously outlines a range of policy paths the administration can take toward these ends, including: the imposition of tariffs to bring trading partners to the table where a coordinated, multilateral dollar devaluation could be negotiated; cutting off allies from US security commitments and from the Federal Reserve’s dollar swap lines unless they agree to exchange their ten-year US Treasury bills for hundred-year bonds; imposing a “user fee” or tax on foreign official holders of US Treasury securities to reduce the inflow of capital into US financial markets; and influencing Federal Reserve policy to assist in weakening the dollar.

Uncertainty and the dollar

Whether the White House chooses to pursue all, some, or none of Miran’s proposals, the discussion itself generates uncertainty about the global dollar’s future. Political scientists Helen Milner and Erik Voeten argue that, even in the absence of fundamental changes to the “building blocks” of the LIO, uncertainty about the stability of those building blocks—including uncertainty about future policy choices—can affect the global economy. If structural uncertainty increases to the point that the equilibrium to which most market actors previously expected to converge is no longer shared, behavior becomes unpredictable.

The Trump administration’s unorthodox position on the dollar is producing uncertainty on multiple fronts. First, there is the apparent end of a US commitment to a strong dollar. If dollar asset holders expect that the currency is in a sustained depreciation, the appeal of US assets will decline relative to alternatives. Second, there is the question of swapping short-term Treasury bills for much less attractive hundred-year bonds, a move that many would consider a technical default on US debt obligations. If the United States can force foreign governments to accept this deal today, it might do so again in the future. This undermines confidence in future bond issuances, making US Treasuries less attractive as a safe asset. Next is the proposal that the United States might deny its partners access to the Fed’s dollar swap lines. This suggestion has already raised anxiety in Europe and, if implemented, would be viewed as an abdication of US monetary leadership. Then there is the suggestion that the United States could impose capital controls to slow financial inflows into US Treasuries. This move would challenge the United States’ fifty-year reputation as the world’s most open financial system and raise questions about its future commitment to liberalism. Finally, the notion that the White House might somehow secure the Federal Reserve’s cooperation in an effort to depreciate the dollar raises questions about the independence of the US central bank, fanning fears about the soundness of US monetary policy and the dollar’s long-term appeal as a store of value. These measures, to say nothing of the use of coercive trade measures or the threat to withdraw US security protections to key allies, have the potential to reshape how the dollar is perceived around the world.

What happens if structural uncertainty about Washington’s global dollar policy increases? We might have witnessed a trial run of this in April amid the unveiling of Trump’s “Liberation Day” tariffs and his unprecedented threats to fire Powell (threats which continue today). Historically, the dollar strengthens and US bond yields fall in times of crisis and uncertainty, as investors rush for the safety of US Treasuries. This is precisely what happened during the initial weeks of the global financial crisis in 2008, as global investors clambered out of risk assets, such as equities and emerging market assets, and into the haven of US debt securities. In April 2025, however, investors sold their riskier US equities as well as their “safe” US government bonds. Rather than the dollar appreciating and government bond yields falling after Trump’s announcement, the dollar slumped and US borrowing costs jumped, shocking markets. Amid swelling uncertainty about the United States’ political commitment to the global dollar and to liberal economic principles, the old currency equilibrium might be approaching its critical point. Uncertainty about US security commitments is also contributing to this instability.

Security and securities

Collective security is a core component of the LIO, with NATO functioning as its cornerstone. The transatlantic Alliance rests on the bedrock principle that an attack on one member is an attack on all, yet Trump’s transactional approach to foreign policy is straining the credibility of Article 5. Today, US allies in Europe and beyond question whether they can count on Washington to guarantee their security in a future crisis.

While the connection might not appear obvious at first glance, a breakdown in trust within the US alliance network could further weaken the dollar’s reserve currency status. Foreign governments that rely on the United States for security tend to hold a higher share of their foreign exchange assets in US dollars. Investments in US government debt subsidize Washington’s ability to pursue an assertive military posture in the world, including providing defense guarantees for its allies. Thus, security dependencies are incentivized to buy Treasuries that finance the US defense capabilities on which they rely. Were Washington to pull back from its defense commitments abroad, the security-driven logic for holding dollars would fade, cutting into demand for dollar assets.

More importantly, as Trump has sown uncertainty about the United States’ commitment to NATO, Europe is now planning for a future in which its security will not depend on the United States. If Europe embraces a unified approach to security-driven fiscal expansion, the euro stands to expand its share of global reserves at the US dollar’s expense.

TINA meets the euro

Hyping the euro’s potential is as old as the euro itself. Upon its introduction at the turn of the century, some observers envisioned the new monetary unit emerging as the dollar’s equal, if not its rival. Jacques Delors, former European Commission president, proclaimed, “the little euro will become big” while former Federal Reserve Chair Alan Greenspan speculated that “it is absolutely conceivable that the euro will replace the dollar as [the] reserve currency.” Though the currency has ensconced itself as the clear number-two international currency, it is a distant second, accounting for 20 percent of global reserves to the dollar’s 57 percent.

The euro’s stunted rise has reinforced the popular view that dollar dominance is destined to endure indefinitely. Even as dissatisfaction with dollar dominance has climbed because of rising US debt levels and Washington’s reliance on financial sanctions, skeptical observers cry “TINA!” (there is no alternative). This argument accepts that the dollar system is flawed but asserts that it remains the cleanest dirty shirt in the laundry bin. The euro cannot supplant the dollar’s reserve role because the sovereign bond market in Europe is too small and too fragmented. Also, China’s authoritarian political system, closed capital account, and non-convertible currency disqualify the renminbi as an option.

These are not unfair characterizations. On size alone, Europe’s $10-trillion government bond market cannot absorb as much of the world’s savings as the $25-trillion US Treasury market. Furthermore, because the currency union lacks an attendant fiscal union, European governments issue debt separately. With the European debt crisis of fifteen years ago still fresh in market memory, investors rightly view German debt differently than debt issued by other Eurozone nations. In short, European sovereign bonds are of varying quality and are available in too limited a quantity to be a viable alternative to their dollar-denominated counterpart.  

Despite these legitimate constraints, the Trump administration’s upending of the United States’ traditional security role in Europe is giving the euro renewed potential as a reserve currency. The European Commission is now calling for the continent to have a self-sufficient defense posture by the beginning of the next decade. To achieve this, the commission acknowledges, “a massive increase in European defence spending is needed,” targeting €800 billion ($930 billion) in newly mobilized financial resources. While not all of this will necessarily be financed through new debt issuances, much of it will. Germany’s surprising elimination of its debt brake—a self-imposed rule that previously limited Berlin’s capacity to deficit spend—is indicative of the change that is already happening.  

The issuance of many new sovereign bonds in Europe over the rest of this decade will prove attractive to central banks looking to diversify away from their US Treasury holdings. Importantly, Europe has space for significant and sustained fiscal expansion; in 2024, the European Union’s collective debt-to-GDP (gross domestic product) ratio was 81 percent compared to 120 percent in the United States. European government bond markets have the capacity to grow more than the US Treasury market over the next ten years, increasing the supply of highly rated euro-denominated bonds in primary and secondary markets. There is also reason for optimism on European progress toward unified Eurobond capital markets: the 2025 commission report proposes that €150 billion of the €800 billion total be raised via a newly created financial instrument that would issue single-branded European Union (EU) bonds and EU bills.

Whether these proposals become reality is a political question more than an economic one. The euro’s stunted rise over the last quarter century is attributable primarily to the lack of political will on the continent to implement the policies necessary for the common currency to reach its full international potential. With an aggressive Russia waging a hot war on its eastern flank and a US president aiming to end what he sees as European free riding on US defense, there has never been a moment riper for the Eurozone to take the steps needed to unleash the euro and take down TINA.

What the future holds

We are less than a year into the second Trump administration. Much is yet to be written, and much can still change. In time, the White House might drop its contrarian view of the reserve currency role as a burden and embrace policies that reinforce dollar centrality. Europe might fail to achieve fiscal unity and expansion, leaving its borders less secure from invasion and its currency’s potential arrested once again. However, if we continue along the current path, the erosion of dollar dominance will pick up speed. Change will come in increments, not overnight, but one day—perhaps within the next decade—the dollar’s share of worldwide reserves will fall below 50 percent. This share will continue to slide, not undoing the dollar’s international role but ending its unquestioned unipolar moment. US global financial power and influence will fall in kind.

History is littered with failed predictions of the international dollar’s imminent demise. The are many reasons why the dollar has endured despite its critics. It has unique infrastructural advantages including its dense, efficient, low-cost, cross-border payment network and the world’s deepest, most liquid, and most open financial markets. It also has incumbency advantage. International currency markets are prone to inertia because of network effects. The benefits any actor derives from using any given currency are directly related to whether others are also using that currency. Once the market settles on a choice (in this case, the dollar) actors have little incentive to change. The dollar has also lacked a true peer competitor in the marketplace. While TINA might not be a strong positive argument for dollar dominance, it remains a powerful, constraining, and stabilizing force. These are all good reasons to bet on the status quo continuing.

Yet it is also true that dollar dominance will not last forever. Eventually, the doomsayers will get it right. As Charles Kindleberger once quipped, “the dollar will end up on history’s ash heap.” Kindleberger was an economist, but one with a keen eye for the fundamental role that politics plays in the world economy. He would have been sympathetic to Gilpin’s observation that monetary regimes and political orders are co-constituted. Dollar dominance and the US-led LIO were constructed alongside one another by a series of mutually reinforcing policy choices. Whether the former can long endure without the latter is the monetary question of our age.

Daniel McDowell is the Maxwell Advisory Board professor of international affairs at the Maxwell School of Citizenship and Public Affairs at Syracuse University and a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center. 

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The post How to dismantle a reserve currency appeared first on Atlantic Council.

There are compelling reasons to believe the euro could play a larger international role. It currently accounts for 20 percent of global foreign exchange reserves—a share it has maintained steadily, even as the dollar’s share has declined. The euro is also used to invoice 40 percent of global trade. 

The current global climate plays to the euro’s advantage, as countries facing high tariff rates seek to diversify away from the dollar. A new wave of free trade agreements by the European Union (EU) could boost euro-denominated trade and gradually shift investor preferences toward euro assets. Additionally, with concerns around the politicization of the US Federal Reserve, the European Central Bank’s high degree of independence and institutional credibility may attract investors seeking stability. 

So far, however, there has not been a global rush to the euro. This serves as a good reminder that a weak dollar does not immediately equate to a decline of dollar dominance. But it also raises a critical question for the euro’s international ambitions: If not now, then when, and under what conditions? Many factors underpin currency dominance, and not all are in immediate reach for the euro. However, it is worth exploring what is realistically achievable for the euro. 

Limited supply of safe euro assets

Lagarde has emphasized that the euro remains “underdeveloped” as a reserve currency. One major reason is the lack of scalable, safe euro-denominated assets—a role that the US Treasury market has long played for the dollar. 

When combined, the eurozone government bond market stands at around eleven trillion euros, which is roughly half the size of the US Treasury market, but it is fragmented across member states with different credit ratings, political dynamics, and liquidity profiles. While Germany’s Bunds dominate the AAA-rated space (€2.25 trillion), they are not issued in volumes comparable to US Treasuries. Supranational bonds remain limited in size and are often tied to specific projects or crises, such as the NextGenerationEU program, or potentially Europe’s defense spending, which Lagarde has suggested could be a joint safe asset.

The EU structurally incorporating joint debt could improve this. It would create a safe euro-area asset, lower borrowing costs for weaker EU economies, and strengthen the bloc’s crisis response capacity. But so far this has faced political resistance, with some member states wary of debt mutualization, moral hazard, and erosion of national fiscal sovereignty. 

But the question is not only whether the EU can issue more debt. It is also whether it should. While the global role of US Treasuries has contributed to the dollar’s dominance, it has also encouraged the United States to rely heavily on debt issuance. This has led to chronic fiscal deficits and a high and rising debt-to-gross domestic product (GDP) ratio. 

The “exorbitant privilege” of issuing the world’s reserve currency can cause structural imbalances and debt problems, and the EU already has enough of both. Under the current fiscal governance framework, the Stability and Growth Pact stipulates that EU countries should not accumulate public debt above 60 percent of GDP. In practice, however, many member states have breached this ceiling, with the average debt-to-GDP ratio standing at 81 percent in 2025. While this remains below the US public debt amount of 124 percent of GDP, the Economic and Monetary Union depends on member states pursuing sound fiscal policy for the effective transmission of monetary policy, as the ECB has repeatedly emphasized. 

If policymakers in the eurozone want the euro to play a greater global role, they must do so on more sustainable terms. This means building scalable and trusted financial instruments, yes, but without falling into the trap of excessive debt-fueled growth. 

Fragmented capital markets

Another major obstacle to a global euro is the lack of a unified capital market. Despite launching the Capital Markets Union initiative in 2014, progress has been slow. European financial markets remain fragmented along national lines, with different legal systems, tax codes, insolvency regimes, and regulatory standards.

This fragmentation discourages cross-border investment and hampers the EU’s ability to mobilize domestic savings for productive investment. In 2023, €11.6 trillion of private wealth—about a third of total EU household wealth—sat idle in bank accounts and cash, while roughly €250 billion flowed to deeper markets such as the United States. 

Following the September 2024 competitiveness report by former European Central Bank President Mario Draghi, which warned that the EU would fall behind the United States and China without increased investment, there has been a renewed push to complete capital markets integration. The European Commission has proposed a savings and investments union aimed at channeling more domestic capital into strategic investments. Central to this effort is the push to strengthen EU-level financial supervision, giving the European Securities and Markets Authority powers similar to those of the US Securities and Exchange Commission. 

Despite political opposition to this by smaller states such as Luxembourg and Ireland, who see risks in outsourcing the supervision of their highly developed financial sectors, this remains one of the most promising strategies for strengthening the euro’s global role. Integrated capital markets would allow capital to flow to where it is most productive, mobilizing European savings and attracting foreign investment. This would bolster economic growth and deepen global holdings of euro assets, boosting its use in reserves, trade, and finance. Additionally, stronger capital markets would mean more international companies could issue debt in euros, use euro-backed derivatives, and denominate contracts in euros.

Don’t bet the house on the digital euro

The digital euro has been touted as a way for the euro to gain ground internationally. European policymakers view it as a tool to reduce dependence on dollar-denominated payment systems and strengthen the euro’s international role. But the digital euro is not a silver bullet, and its proposal still lacks political momentum, having been stalled in the European Parliament for more than two years.

At the retail level, the EU faces stiff competition from payment networks dominated by US credit card companies. A digital euro could diversify the system, but only if widely adopted—something that hinges on incentives and user experience. Wholesale applications hold more potential, particularly as financial markets move toward tokenization, or the digital representation of assets. But this will take time and depends heavily on cross-border coordination. 

While the digital euro may improve payment efficiency and enhance monetary sovereignty, it will not resolve the structural constraints holding back the euro’s global ascent. Deep and liquid capital markets, large-scale safe assets, and a unified political strategy still matter far more. 

External pressures on euro growth

In addition to internal constraints, the euro also faces external challenges—most notably from China. Chinese firms have expanded into strategic sectors, such as electric vehicles (EVs), renewable energy technologies, and specialized machinery—areas where European companies, particularly German ones, have traditionally led. Facing overcapacity, a slowing domestic economy, and escalating trade tensions with Washington, Beijing is increasingly redirecting its industrial surplus toward Europe. At the same time, Chinese firms are outcompeting European manufacturers in global markets, and China is buying fewer high-value European exports as it develops its own capabilities. This poses a direct challenge to Europe’s export-led growth model, particularly for economies such as Germany’s, where manufacturing and trade surpluses are foundational. The resulting pressure on Europe’s industrial base threatens to erode the real economic strength that underpins the euro’s credibility as a global currency.

The EU has recognized the need to “de-risk” from China, and it has taken important steps to do so, including the Critical Raw Materials Act, the Foreign Subsidies Regulation, and anti-subsidy probes into sectors such as EVs and solar panels. However, many of these efforts remain underfunded, reactive, or politically fragmented. Meanwhile, the EU’s trade defense and investment screening instruments are constrained by limited enforcement capacity and a narrow focus on specific companies rather than systemic risks. This has allowed China to continue to find workarounds. 

To safeguard the euro’s international position, EU member states need to align on a coherent de-risking strategy and commit to an EU-wide industrial policy including bold investments in European green and digital technologies. Divergent national interests—Germany’s dependence on China, France’s reluctance to antagonize China, and southern and eastern Europe’s preference for engagement—have thus far weakened Europe’s collective leverage and have blunted its policy response. If the EU fails to act cohesively, then it will not only lose ground in strategic sectors but risk diminishing the euro’s credibility as a stable, globally relevant currency anchored in real economic strength.

A political union without political unity

While each of these issues has technical dimensions, they are all ultimately political. Fundamentally, the euro’s global ambitions are constrained by the EU’s institutional design: a monetary union without a true fiscal or political union. Each member state has its own priorities, domestic constituencies, and red lines—making consensus slow and hard-won.

The EU has shown it can act boldly in times of crisis, overcoming these divisions. But once the immediate danger passes, momentum stalls. Even now, with rising national security threats and trade tensions pushing EU member states closer together, the prospects of a stronger euro and deeper integration are falling victim to the familiar pattern of national vetoes, legal ambiguities, and competing visions for the EU’s future.

The European Central Bank and the European Commission can promote initiatives, but without member-state alignment, implementation will be piecemeal. The EU has many of the ingredients for a globally dominant currency, but it cannot rely on crises alone to drive change. To make the euro truly global, EU members would need to align political priorities around a shared strategic vision.

Lize de Kruijf is a program assistant within the GeoEconomics Center’s Economic Statecraft Initiative and she previously worked for the Dutch Ministry of Foreign Affairs in the International Trade and Enterprise department.

Dollar Dominance Monitor

This monitor analyzes the strength of the dollar relative to other major currencies. The project presents interactive indicators to track BRICS and China’s progress in developing an alternative financial infrastructure.

The post As the dollar wobbles, why has there not been more flight to the euro? appeared first on Atlantic Council.

That’s why the world’s financial leaders are closely watching the debate playing out in Congress right now over the future of stablecoin legislation. Next week, the Senate will likely take up the GENIUS Act, which will define the responsibilities for US stablecoin issuers and clarify who is responsible for oversight. 

Stablecoins are cryptocurrencies whose values are pegged to a specific underlying asset. This makes them “stable”—at least in theory.

Currently, 98 percent of stablecoins are pegged to the US dollar, but over 80 percent of stablecoin transactions happen outside the United States. 

Countries around the world are taking notice. In April, Italy’s finance minister, Giancarlo Giorgetti, said that new US policies on dollar-backed stablecoins present an “even more dangerous” threat to European financial stability than tariffs. His argument was that access to dollars without needing a US bank account would be attractive to millions of people and could undermine the effectiveness of monetary policy not just in Europe but around the world.

In many ways, it’s an old problem with new technology. Dollarization—the situation where citizens in another country try to swap their local currency for dollars—has been a risk in emerging markets and developing economies for decades. In the early 2000s, for example, a range of countries from Ecuador to Zimbabwe to Argentina had difficulty managing the demand for dollars instead of local currency. In each situation, years of economic pain followed in these countries. 

Now stablecoins are making it cheaper and easier for people around the globe to get ahold of what is still the single most in-demand asset in the world.

Instead of the old way of having to go to a bank and exchange local currency for US dollars, which is time consuming and often involves significant fees, stablecoins make dollars seamlessly available to anyone with a cell phone.

US officials argue that this benefits the United States. When I interviewed Federal Reserve Governor Christopher Waller, who oversees payments at the central bank, about this issue in February, he said that stablecoins “could be in any fiat currency,” such as pounds or euros, “but everyone wants dollar-denominated stablecoins.” He added that “if we can get good regulation, allow these things to go out, this will only strength the dollar as a reserve currency.”

Waller’s point was that if stablecoin issuers need to back up their coins with Treasuries or other liquid assets, the increase in stablecoin usage around the world will generate even higher demand for dollars. The whole point of a stablecoin is that you can fully convert it into a dollar if you want to—meaning the issuers need to have those dollars on hand.

US Treasury Secretary Scott Bessent has put it even more bluntly. “We are going to keep the US the dominant reserve currency in the world, and we will use stablecoins to do that,” he said in March.

If so, the United States should tread cautiously. 

The global proliferation of stablecoins means that some companies will take advantage of the demand and issue stablecoins that claim they are digital versions of the dollar but in reality aren’t fully backed by dollars.   

If that company failed, it wouldn’t just cost consumers their savings. It could trigger a run on all kinds of financial assets.

Think back to the collapse of the algorithmic stablecoin TerraLuna in 2022. Over $45 billion in value for TerraLuna holders was wiped out within a week. But since that time, stablecoin volumes have increased across the world by over 60 percent. 

The current patchwork of regulations around the globe creates more confusion, more friction in payments, and ultimately higher costs for consumers. 

Already, that’s what’s happening. As new research from the Atlantic Council GeoEconomics Center shows, some countries want to create their own central bank digital currencies to compete with stablecoins, while other countries are trying to regulate the wallets that hold stablecoins. 

Instead of waiting for new regulatory fences to be built up in the coming years, the United States should show that it recognizes the concerns other countries have about dollar-backed stablecoins. The legislation in front of Congress helps domestically by creating transparency and reporting requirements, but it does little internationally.

This is where the Group of Twenty (G20) comes in. The United States has a golden opportunity to help set international standards around digital assets, including the risks and regulations associated with stablecoins, during its G20 presidency next year. A key first step would be creating a new G20 payments roadmap. 

A first roadmap was agreed to in 2020 and delivered important innovations on faster payments. But technology has rapidly changed in the past five years, and it’s time for an upgrade. 

If the United States made stablecoins a focus this year, it would raise the bar across the world and ensure that dollar-backed stablecoin users in all countries are getting what they bargain for—an actual dollar—instead of an imitation of one. 

The rest of the world will welcome US leadership in this space and will take it as a sign that, at least when it comes to the future of the dollar, the United States is not looking to export instability.

Josh Lipsky is the chair of international economics at the Atlantic Council and senior director of the Atlantic Council’s GeoEconomics Center. 

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Within the Trump administration, there appear to be competing and sometimes contradictory perspectives over what dollar dominance means for US policy interests. The perspectives mirror broader debates beyond the White House about the role of the US dollar. Three divergent playbooks—around the dollar as a reserve, payment tool, and store of value—are worth exploring, not least because they are increasingly at odds.

The “America first” dollar

For Trump, the dollar’s international role appears to be of a piece with his broader “America first” philosophy. Trump’s statements suggest that he sees the use of the dollar in global payments as a symbol of US nationalism. During his campaign, for example, Trump threatened to impose 100 percent tariffs on nations from the BRICS group of emerging economies and others seeking to build alternative currency blocs aimed at undermining “the mighty US dollar.” In his words: “You leave the dollar, you are not doing business with the United States.”

Trump’s renewed tariff policy risks undermining dollar dominance by disrupting the economic relationships that have sustained the global dollar system. The many countries that run trade surpluses with the United States value holding and using dollars in international trade. This is because the dollar boasts strong network effects and highly liquid markets. It offers ease of trade and the convenience of invoicing and settling in a single dominant currency. This creates a cycle: Dollars flow out when the United States imports more than it exports, and then those dollars come back as foreign investment in US assets. If the United States reduces imports significantly—via tariffs or trade restrictions, for example—fewer dollars flow abroad. There are already signs that this is happening: Foreign investors have sold $63 billion in US equities between March and April 2025, and the US dollar index is down 8 percent this year. This marks a major retrenchment given that foreign investors entered 2025 with a record 18 percent ownership share of US equities.

Although tariffs are paid by US importers, they also hurt foreign exporters by reducing demand for their goods. Importantly, these tariffs signal that the United States is willing to use its dominant position in global trade and finance as a tool of coercion. In response, affected countries may seek to reduce their dependencies on the United States by developing alternative payment systems, trading in local currencies, and diversifying their reserves. These likely consequences may be an incentive for the administration to pursue a more moderate tariff policy than originally announced, as is already happening, at least temporarily.

Trump also sees domestic innovation in private sector financial technology as central to sustaining the dollar’s global role. On January 23, Trump signed an executive order encouraging the development of dollar-backed stablecoins issued by private firms to enshrine dollar dominance. As much as 80 percent of the flow of dollar-backed stablecoins is happening outside of the United States, and countries such as Argentina, Brazil, and Nigeria have seen significant adoption of stablecoins for remittances or as a hedge against local currency instability. 

US Treasury Secretary Scott Bessent and Federal Reserve Governor Christopher Waller have emphasized that stablecoins could reinforce the dollar’s primacy by creating new demand for US Treasuries, since almost 99 percent of stablecoins are dollar-denominated. While the widespread adoption of dollar-backed stablecoins could reinforce dollar dominance, it also introduces new vulnerabilities. For example, stablecoins could potentially accelerate de-dollarization, especially if nations become concerned about excessive dollarization of their economies and threats to monetary sovereignty. 

According to the Atlantic Council’s central bank digital currency (CBDC) tracker, there has been a global increase in retail CBDC development since the Trump administration took office—potentially signaling that countries are creating domestic digital alternatives specifically designed to limit the proliferation of dollar-backed stablecoins in their economies. Moreover, if inadequately regulated, stablecoins could pose systemic risks—such as triggering bank runs or forcing the liquidation of reserve assets during periods of financial stress, destabilizing Treasury markets. Furthermore, widespread stablecoin adoption without appropriate regulations could lead to shadow payment systems evading traditional oversight, undermining sanctions and monetary policy.

Internal tensions within the Trump administration on digital assets are already emerging. Trump’s inner circle of business leaders appear to favor the broader adoption of digital assets to bolster US competitiveness, while national security officials seem to worry that stablecoins could facilitate money laundering and terrorism financing, as well as undermine Washington’s ability to effectively wield sanctions. The ultimate role of stablecoins in the dollar’s international standing will depend on whether these two groups can reconcile the multiple priorities at stake.

The dollar as an economic burden

But there are other views on the dollar in the White House, as well. Stephen Miran, the chairman of the White House Council of Economic Advisers, has argued that the dollar’s reserve currency status comes at a steep cost to American workers and industry. In November 2024, Miran framed the dollar’s reserve currency status as a structural liability—one that forces the United States to run persistent trade deficits and maintain an overvalued dollar to meet global demand for safe dollar-denominated assets. At the time, Miran proposed unconventional remedies, including purposely devaluing the dollar to create a multipolar currency system to share the reserve status burden. 

Miran seems unconcerned about the dollar’s share of global central bank reserves but acknowledges the risks of a weaker dollar—primarily that investors might abandon dollar assets, increasing US borrowing costs. His proposed solution is to “term out” US debt by convincing countries to exchange short-term holdings for one-hundred-year bonds. While this would lock in foreign investment and reduce rollover risk, the extremely distant maturity could undermine trust rather than build it. Reserve holders prioritize liquidity and flexibility, so dramatically extending maturities might backfire, accelerating diversification away from dollar assets as the currency depreciates.

A fractured coexistence

At the heart of these competing views lies a critical tension that policymakers must address: The dollar serves multiple functions globally, and each function demands distinct strategic approaches.

Miran’s critique focuses on the dollar’s role as a reserve currency. Trump’s BRICS tariff threats, by contrast, focus on the dollar’s payments role. And the Federal Reserve and Treasury’s emphasis on stablecoins is best understood as an attempt to bolster the dollar’s store-of-value function. These are different hats that the dollar wears, and they often require divergent policy responses. Managing one of the hats without due attention to the others risks internal contradictions that could erode the very dominance policymakers seek to preserve.

It is unclear which side within the administration will ultimately have more influence, leading to uncertainty about US policy in the interim.

So what’s the dollar strategy, then?

To maintain long-term dollar dominance, the Trump administration should focus on creating a cohesive policy that reconciles the dollar’s multiple roles and avoids conflicting policy actions. Central to this effort should be a commitment to financial stability (avoiding large-scale tariffs, significant currency manipulation, and cryptocurrency spillover). The world is more likely to view the dollar as trustworthy when it sees the United States as a stable and reliable custodian of foreign assets.

Here are three specific ways the White House can pursue a strong, cohesive dollar policy:

Promote responsible innovation and oversight of dollar-backed stablecoins: The administration—particularly national security agencies, the Treasury, and the Federal Reserve—should actively monitor risks posed by the global proliferation of dollar-backed stablecoins. Policymakers should not ignore the accelerated dollarization of emerging markets and potential restrictive responses. Regulation alone is insufficient; clear enforcement mechanisms are needed to ensure compliance and mitigate systemic risk.

Seek stability through strategic trade measures: The administration should prioritize a stable trade policy and eliminate broad, across-the-board tariffs. Instead, it should apply targeted measures to address specific instances of nonmarket practices and currency manipulation. This would help preserve the dollar’s role by maintaining global investor confidence and ensuring continued dollar circulation in trade without disrupting broader relationships or supply chains.

Reinforce institutional credibility and policy coordination: Reaffirming the Federal Reserve’s independence is important for maintaining global confidence in US monetary policy, capital markets, and the dollar’s long-term strength. At the same time, the administration should enhance the coordination of analytic efforts and ensure consistency across agencies in messaging and policy implementation on dollar-related issues. This could be achieved by more effectively leveraging existing interagency structures, such as the National Security Council and the National Economic Council. Or, if necessary, it could be done by creating a new, dedicated coordination mechanism. The key objective is to deliver greater clarity, predictability, and coherence in the government’s approach.

Above all, policymakers should recognize that the greatest threat to the dollar is not external—it is the erosion of trust in the United States’ political and legal institutions. The dollar is not just backed by the size of the US economy; it is backed by faith in the rule of law, the sanctity of contracts, an independent central bank, and the stability of democratic governance. Structural advantages—network effects, deep capital markets, and the dollar’s centrality to global payments—make its dominance resilient. But these foundations are only as stable as the legal, political, and institutional frameworks behind them. If that foundation weakens, then no number of tariffs or volume of stablecoins can preserve the dollar’s central role in the global system.

For now, there is no viable alternative to the dollar. But the Trump administration’s competing and fractured view on the dollar’s various roles may cause enduring harm to its long-term dominance.

Alisha Chhangani is an assistant director at the Atlantic Council’s GeoEconomics Center.

Israel Rosales contributed to the data visualization in this article.

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This Atlantic Council Strategy Paper explores the relationship between the status of the United States as a geopolitical superpower and the role of the US dollar as the world’s dominant currency. It examines how these two facets of US power have reinforced each other and how a decline in either of them could trigger a downward cycle in US influence around the world. The report discusses options for how the United States could counteract such trends, relying on its traditional strengths and strategic alliances.

How to keep the dollar at the center of global trade

Over the past eight decades, the status of the United States as an economic and geopolitical superpower and the role of the US dollar as the world’s dominant currency have reinforced each other. As a synonym for the dollar’s preeminent role in international currency transactions and foreign reserve holdings, dollar dominance has long been associated with the United States’ exorbitant privilege to finance large fiscal and current account deficits at low interest rates. This has helped the United States run a large defense budget and conduct extensive military operations abroad. In turn, the United States has used its military capabilities to support the free flow of goods and capital across the globe, boosting global growth while providing investors with confidence that investments in US financial instruments are secure. This virtuous cycle contributed to the long-lasting stability of the post-World War II international order, leading to a sustained rise in economic welfare in the United States and around the world.

As the size of the US economy relative to the rest of the world continues to shrink, this dynamic may begin to be turned on its head.¹ Maintaining a global military presence would be harder to finance in the future if the US dollar were to lose its dominant reserve position, reversing the virtuous cycle and precipitating a US loss in global influence. This is one of the reasons why strategic competitors, such as China and Russia, currently work toward a “dedollarization” of their economic relations and global financial flows more broadly. Although last year’s BRICS summit failed to make progress on an alternative financial order, China and Russia are set on undermining the leading role of the dollar, limiting the United States’ ability to impose sanctions, and making it more costly to service its debt and finance a large defense budget.²

There is currently no other currency (or arrangement of currencies) that could challenge the US dollar’s preeminence, however. Even a smaller role of the dollar in global trade transactions would not immediately challenge its reserve currency status, given the lack of investment alternatives in other currencies at a scale comparable to US markets. The dollar has also benefited from strong global network effects that would be difficult to replace (that is, the costs for any country to divest into other currencies remain prohibitively high unless other countries do the same). Nevertheless, the tariff measures recently announced by the Trump administration could lead to a decline in the global use of the dollar, especially if they were accompanied by a decline of trust in the United States as a safe and liquid destination for global financial assets. Similarly, a proposal by the current chair of the Council of Economic Advisers to use tariffs as leverage for negotiating favorable exchange rate parities with US trade partners and to restructure their US Treasury holdings into one-hundred-year bonds—a so-called Mar-a-Lago Accord—would deliberately weaken the dollar to support domestic manufacturing. This could further erode the currency’s global dominance. Both scenarios would involve high costs to the world economy, including for the United States. More fragmented markets and higher financial volatility would be associated with income losses and higher inflation. Facing higher borrowing costs, the United States would be forced to make difficult spending decisions between its military budget, social welfare programs, and other priorities. Its global leadership role would decline, allowing strategic antagonists to benefit from any vacuum that a smaller US role would leave behind.

It is therefore vital to US national security that the dollar retain its role at the center of global trade and financial networks. This paper proposes ways for the United States to maintain the attractiveness of dollar-denominated assets for foreign investors, arguing for a speedy resolution of tariff disputes that have a strong potential to weaken its global standing. It underscores the need to compensate for a relative decline in US economic and military capabilities with strong alliances, which would deny China and other autocratic states a strategic opportunity to weaken the United States’ influence on the world stage and the exorbitant privilege that the dollar’s role as the global reserve currency still confers.

Strategic context

For the past eighty years, the United States’ economic and geopolitical preeminence and the role of the US dollar as the world’s dominant currency have contributed to a vast increase in global trade and capital flows. The “exorbitant privilege” to finance large fiscal and current account deficits at low interest rates helped the United States maintain its large geopolitical footprint, which contributed to the stability of the environment fostering global commerce and investment. However, as the center of the world’s population and economic activity has been shifting toward Asia and Africa, the virtuous cycle supporting the US-led global architecture threatens to come to an end, giving way to greater economic and geopolitical volatility.

The exorbitant privilege

The US dollar’s rise as a global reserve currency dates back to about a century ago, when the British empire was in decline after World War I. The United States had become the world’s agricultural and manufacturing powerhouse, its largest trading nation, and a major source of foreign capital around the globe. It was natural for the dollar to also become one of the major currencies used for international transactions, and it eventually started to replace the pound as central banks began to hold larger shares of their reserves in dollars in the late 1920s. The transfer was backed by the economic dynamism of the world’s richest democracy and, after 1945, its might as a victorious military power.

In the early years after World War II, the dollar was the anchor for the Bretton Woods system of fixed exchange rates, established on a US promise to exchange dollars for gold at a fixed parity. It became increasingly clear, however, that the gold-based system was not adequate for a fast-growing global economy that underwent a gradual liberalization of capital flows. In the meantime, French government officials accused the United States of exploiting the status of the dollar to run up large fiscal deficits (driven by the costs of the Vietnam war), a phenomenon they dubbed the “exorbitant privilege.”³ However, when the United States under President Richard Nixon decided to take the dollar off its gold parity in 1971, this did not provoke a major flight away from the US dollar—on the contrary, the dollar itself had by then become the anchor for the global financial system.

Today, more than fifty years after the “Nixon shock,” the United States still benefits from the dollar’s leading role in the global economy, even as the relative size of the US economy has shrunk. Until recently, dollar payments accounted for 96 percent of trade in the Americas, 74 percent in the Asia-Pacific region, and 79 percent in the rest of the world outside Europe. About 60 percent of global official foreign reserves were held in dollars, and about 60 percent of international currency claims (primarily loans) and liabilities (deposits) were denominated in dollars. The United States was the world’s largest investment destination, with foreign direct investment (FDI) totaling $12.8 trillion. Inward FDI flows have increased five-fold in the last three decades with $311 billion in new investment in 2023 (see Figures 1 and 2).

Figure 1. Inflows of foreign direct investment (FDI) to the United States were the same in 2000 and in 2023 (in millions of dollars)

Figure 2. Stock of FDI in the United States has increased five-fold since 2000 (on a historical cost basis, in trillions of dollars)

In an era of floating exchange rates and liberalized capital markets, one should nevertheless be realistic about the benefits the dollar’s status as a reserve currency. It is true that the United States can borrow exclusively in its own currency; it also enjoys somewhat lower interest costs because other countries’ official reserves are being invested in US Treasury securities; and it generates seigniorage income from dollars being held abroad. But real interest rates among the advanced economies have moved broadly in tandem in recent years, and estimates for the interest savings on US treasury bonds due to the US dollar’s reserve currency status amounted to some 10 to 30 basis points at best. The exorbitant privilege therefore seems to lie mostly in the volume of debt the US government can borrow without incurring higher interest rates. One recent estimate, for example, suggests that the reserve currency status of the US dollar increases the sustainable level of US government debt by 22 percent.⁴

US deficit financing

The large size of the US economy and demand for US government securities have made US financial markets the deepest and most liquid markets in the world, with about $27.4 trillion in outstanding US government debt as of July 2024. This has been supported by strong institutions and a transparent regulatory environment, the absence of capital flow restrictions, and the wide range of services offered by the US financial industry, which all have attracted foreign capital into the United States. The importance of US debt markets was also evident during times of crisis when global shocks tended to trigger a “flight to safety” into US assets.

The market depth and safety of US dollar assets are features that traditionally distinguished the United States from other major economies that also have large financial markets and issue bonds primarily in their own currency, such as the euro area, Japan, or the United Kingdom. Moreover, these countries do not have their own means to guarantee their geopolitical security; they depend on alliances with the United States as the ultimate sovereign guarantor. This is in large part a function of US military strength and the US nuclear arsenal, backing up NATO’s credibility as a collective defense organization. Although these factors used to be rarely invoked as an explicit factor in investment decisions, investors’ trust in the ability of the United States to preserve its dynamic economy and honor its financial obligations even during times of conflict lies at the heart of the US dollar’s global dominance.

The strong preference of investors for US dollar assets allowed the United States to run permanent current account deficits in recent decades, driven both by government spending and the low saving preferences of its households. As a side effect, the United States has often functioned as a “locomotive” for the global economy, providing growth impulses for export-oriented economies such as China, Japan, or Germany, whose high saving rates and current account surpluses are the counterpart to US deficits. Moreover, for many years, differences in the composition of US financial assets (largely FDI and other equity) and liabilities (lower-yielding bonds) provided the United States with a positive foreign income balance despite the growing amount of net foreign liabilities.

Will the good times last?

Even before the current administration sought to reorient global trade patterns by imposing tariffs on allies and other trading partners alike, the question was whether and how long the United States would be able to hold on to the dollar’s dominant role. There were several developments that pointed to a more difficult future ahead, including demographics, geopolitics, and technological trends. Already at that time, however, it was clear that domestic policy choices would ultimately determine whether the United States would hit a limit in the willingness of foreign investors to finance its rising liabilities vis-à-vis the rest of the world.

First, while the US dollar is still the world’s leading reserve currency, its share in central banks’ reserve holdings has gradually fallen in recent years. The dollar’s share declined from around 70 percent in the 2000s to 60 percent in 2022, when it was followed by the euro (20 percent) and several currencies in the single digits, including the yen, pound, and Chinese renminbi. The renminbi has gained some market share as a reserve currency in recent years; yet China, with its closed capital account and politically uncertain investment climate, has not been able to significantly increase international use of its currency. Instead, most gains have been made by a range of smaller currencies, including the Australian and Canadian dollars, reflecting digital technologies that have facilitated bilateral transactions without involving the US dollar as a bridge currency. Smaller currencies may indeed continue to gain market share, but there could also be other shifts in the global reserve composition, depending on the further evolution and impact of US trade and sanctions policies. The rise in gold prices, for example, has been attributed to central banks increasing their holdings within their reserve portfolios.

Second, US net foreign liabilities have increased sharply since the global financial crisis, increasing to about 70 percent of gross domestic product (GDP) by 2023. To put this in perspective, only Greece, Ireland, and Portugal are larger net debtors among industrial and emerging economies, and US net liabilities are equal to 90 percent of the net assets of all creditor countries combined. Since current account deficits have generally been modest over the past decade, the decline owes to valuation changes stemming from the strong performance of US equity markets relative to international markets, increasing the wealth of foreign investors holding US stocks. To serve these net liabilities, foreigners implicitly expect US companies to remain highly profitable and the United States therefore to run larger trade surpluses going forward. With the dollar gradually appreciating in recent years, it remains to be seen whether these expectations can be met or whether foreign investors will reduce their net holdings of US assets. The increasing negative interest balance (and the fact that much of the positive net returns on FDI were due to profit shifting into Ireland and other low-tax foreign domiciles) has caused some to argue that the extraordinary privilege is no longer in existence.

Third, prospects of continued large budget deficits could make it more costly to finance US government debt in the future. The Congressional Budget Office (CBO) has projected US budget deficits to remain above 6 percent of gross domestic product (GDP) over the coming years. This projection is made on the basis of current law, that is, assuming the expiration of both the 2017 Tax Cuts and Jobs Act (TCJA) passed during the first Trump administration and the healthcare subsidies passed during the Obama administration. Even under this optimistic assumption, government debt is projected to rise from 98 percent of GDP in 2024 to 118 percent of GDP in 2035. While the current administration has vowed to impose significant expenditure reductions to accompany the presumed extension of the 2017 tax cuts, failure to reduce the US deficit could drive long-term interest rates higher in coming years.

Even so, until recently, it seemed too early to worry about the safe asset status of US government securities per se. This was in large part because there are currently no instruments that could match the role of US government securities at comparable volumes. However, the stability of US debt dynamics rests in no small measure on the continued performance of the US economy, which in turn depends on strong institutions and sound economic policies. History shows that political polarization has the potential to undermine both of these pillars, a warning that would be important for the US government to heed while it is reducing government functions and cutting back its public workforce. As Steven B. Kamin and Mark Sobel write, “partisan divisions, political dysfunction, and the resultant inability to cope with the nation’s challenges” should be considered the main risks to long-term US economic prospects and dollar dominance. The administration’s willingness to risk a deep recession to launch an elusive manufacturing renaissance in the United States plays precisely into those concerns.

Even before April 2025, trade restrictions had significantly increased in recent years after declining for most of the twentieth century. The geoeconomic fragmentation driven by the COVID-19 pandemic, Russia’s war of aggression in Ukraine and, most recently, economic tensions between the United States and China, could now drive a major reorganization of global economic and financial relationships into separate blocs with diminishing overlap. A study by the International Monetary Fund (IMF) estimates that greater international trade restrictions could reduce global economic output up to 7 percent. In case of a wider trade conflict, smaller countries could be increasingly forced to choose sides, with those moving closer to China likely aligning their currency use for international transactions and reserves away from the US dollar and the euro.

Fifth, the United States has used sanctions as a tool of foreign policy, particularly against Russia in the wake of its 2022 invasion of Ukraine. This led to the suspension of trading in US dollars on the Moscow Exchange (MOEX), disrupting financial operations not only within Russia, but also affecting other international market players as a result of the extraterritorial nature of the US sanctions. Since 2014, following the sanctions related to the annexation of Crimea, Russia has increased its use of the Chinese yuan, which became MOEX’s most-traded currency (54 percent in May 2024). Concerns about their bilateral trade relations with Russia and China have other countries looking for alternatives to mitigate possible risks associated with US dollar transactions, for example, in the BRICS grouping, which is set to further expand its membership of emerging market economies in coming years. If accompanied by bilateral tariff increases, as currently envisaged by the Trump administration, this could have further implications for the dollar’s role in global trade transactions.

Finally, in the context of a geopolitical fallout, potential tariffs between the United States and the EU could significantly impact the transatlantic economy, which remains the most important bilateral trade and investment relationship for both partners. For example, a 10 percent universal tariff on all US imports is projected to reduce EU exports to the US market by one-third, and subsequent retaliation could similarly hurt US exporters. Higher interest rates in response to tariff-induced inflation would have additional growth implications. All this could heavily weigh on financial markets on both sides of the Atlantic, further reducing the attractiveness of US dollar-denominated assets.

Limits to military superiority

Any developments that weaken the US economy and the role of the dollar could also affect the United States’ ability to preserve its military superiority. China is in the middle of an extraordinary defense buildup that is challenging US strategic positions in the Indo-Pacific theater. Moreover, the Ukraine war has led to stepped-up cooperation between Russia, Iran, and North Korea (which has been contributing troops to compensate for Russia’s losses), and China increasingly supports Russia’s armament efforts by supplying it with drones and dual-use technology.

The United States and Europe have also been pushed on the defensive in Africa as China, especially, has made strategic inroads there, as have Russia, India, and countries in the Persian Gulf. Many countries are looking to China for help in developing their energy and transport infrastructure, imports of low-cost consumer and investment goods, and market access for their own exports, allowing the use of strategic ports and other locations in exchange.

At the same time, China has a hold on supply chains involving critical raw materials, controlling 85 percent of the world’s refined rare earth materials, which are crucial for high-tech military technologies. If made unavailable to the United States, this could significantly complicate the production of advanced weaponry. The global processing capacity for critical raw materials is also highly concentrated in China, providing it with means to influence market prices and access, and creating supply chain vulnerabilities and dependencies.

Advances in military technology toward low-cost weapons, lower procurement costs in competitor countries, and a relative decline in US manufacturing capabilities (e.g., in shipbuilding) pose significant challenges to US military strength. While the United States retains a large nominal advantage in military spending over other competitors, the discrepancy is smaller when considering cost differences; in other words, the United States has a smaller advantage in real terms than suggested by simple budget comparisons (see Figure 3).

Figure 3. Combined military spending by China, Russia, and India outstrips the US when calculated by purchasing power parity (2019, in billions of dollars)

In fact, a recent congressional review of US defense strategy has raised concerns that the United States is not ready for a multifront war spanning theaters in Europe and Asia. US forces have also been slow to adopt new battlefield technologies, including a trend toward autonomous weapons systems, which will take considerable time to redress. In addition, the end of the New START treaty in 2026 could trigger a nuclear arms race that would force the United States to expand its nuclear forces after decades of deep cuts.

While the United States is still the only country able to project military power at any point in the world, it is unlikely to be able to respond to these challenges on its own. The room to dedicate additional fiscal means to the US defense budget is increasingly circumscribed by growing interest and entitlement spending (see Figure 4), and even under optimistic assumptions, there is a risk of strategic overreach for the United States, given the magnitude of challenges across different regional theaters.

Figure 4. Projected federal outlays show entitlement spending and growing interest may curb defense spending (2025, as a percentage of federal revenues)

While US presidents have long called for European nations to play a bigger part in their own defense, the second Trump administration has ramped up the pressure on NATO allies to take on a larger military role and financing burden in the European theater. However, raising the combat readiness of European armed forces will require several years under the best of circumstances. Unless the United States is willing to cede military dominance in Europe to Russia, it will need to continue supporting its European allies—including in arms production, securing supply chains, and military burden sharing—for the foreseeable future.

If the United States were to forgo a deepening of its alliances in Europe and become outmatched by China in Asia, it could in principle still benefit from the relative safety of its continental geography. However, it would face a loss of military stature and reduced global reach. No longer being a global hegemon, the United States would not be able to protect global trade and financial flows in the way it has done in the past, hurting itself and other economies that similarly benefited from open trade. The United States would leave a vacuum of power that would most likely be filled by China and other autocratic countries, with detrimental effects for its own security and economic stability.

Goals

This paper proposes a strategy to preserve the US dollar’s lead role in international markets, allowing it to continue attracting foreign capital at favorable interest rates. As laid out above, the dominant role of the US dollar has been a key element in a decades-long virtuous cycle that allowed the United States to finance its large military apparatus while expanding its social safety net and keeping a low tax burden.

With the rise in public debt and the sharp increase in net international liabilities, this cycle cannot continue indefinitely. The time has come for the United States to begin reining in deficit spending and rebuilding its fiscal position. Notwithstanding the Trump administration’s commitment to this objective, this process will take time, given continued pressure on defense and entitlement spending. Continued dollar dominance would therefore be critical for keeping a lid on interest rates while nurturing a political consensus that could lead to a lasting decline in government deficits over several administrations.

Continued dollar dominance would also be beneficial from a geopolitical perspective, providing the United States with leverage in shaping the future of global finance, leadership in multilateral organizations, and the continued possibility of sanctioning opponents to raise the cost of acting against US interests. Having said that, the United States’ ability to dominate global developments on its own will likely continue to diminish. To maintain and reap the full benefits of the dollar as a reserve currency, it will need to rely more on networks with countries that have trade, financial, and security interests that align with those of its own. These networks evolve around shared interests, and they will only thrive in an environment of mutual respect and give-and-take.

Breaking up such networks by way of a US isolationist withdrawal—the possibility of which is as high as it has been at any time in the past century—would trigger a fragmentation of the global economic and security landscape with large losses in general welfare (i.e., prosperity and well-being) both in the United States and abroad. It would accelerate the decline in the dollar’s reserve status as it could force countries to fundamentally rethink their security arrangements, possibly leading to a reorientation of trading and financial relationships toward China and other illiberal states.

In fostering US interests, the objective for US policymakers should therefore be to maximize the mutual advantages accruing from working with countries that benefit from the United States’ global economic and security footprint, as well as the stability provided by the dollar as a leading currency. If the United States manages to pursue its domestic interests while remaining at the center of a network of powerful alliances, the dollar’s reserve currency status and its exorbitant privilege could serve US interests for years to come.

Major elements of the strategy

In principle, the new US administration has a strong opportunity to address the geopolitical challenges facing the United States, given its decisive electoral victory and control over both houses of Congress. While there is clearly a risk that ideological priorities might preempt serious work on other issues, the presence of growing external threats should eventually refocus attention on several objectives that would be in the strategic national interest.

Foster strong and robust long-term growth

The first objective coincides with one of the administration’s key priorities, namely, to create the conditions for strong US economic growth and employment over the long term. This is a necessary condition for the United States to retain its economic and military superpower status: Without a strong economy, the burden of maintaining a global footprint would eventually become suffocating and capital would become increasingly unavailable to support a growing debt burden. In the worst case, the United States would follow the example of the United Kingdom, whose leading global status was gradually eclipsed by other powers during the last century (see Figure 5).

Figure 5. China’s GDP growth rates have outpaced those of the United States and the European Union for more than two decades (2000–2024, measured at constant prices)

The question is how the dynamism of the US economy can be maintained against the background of weakening demographics, rapid technological change, and fragmenting global trade. These trends challenge the business model of established US companies, especially those competing against Chinese or other firms that benefit from the tools of state capitalism being deployed by their home countries. Moreover, supply chains for critical raw materials and intermediate products seem more tenuous in the future, given the dominant position of China in key industries.

From a trade perspective, there are two considerations that the administration should have balanced. On the one hand, firms should be allowed to continue to operate in an open and competitive market environment that rewards innovation and efficiency, in turn allowing the United States to reap the productivity gains necessary to generate future gains in income and welfare. On the other hand, it would be naive to expect US companies (or industries) to thrive in sectors where state-backed competitors enjoy large-scale cost advantages due to extensive subsidies or other forms of state support. This suggests that the new administration should have avoided a protectionist trade stance, shielding a large part of the US economy from foreign competition. However, it should also have been prepared to stave off an economic decline of sectors that could be critical for long-term economic or military purposes.

In early April, however, the administration took an opposite approach by raising tariffs on almost all other countries in proportion to bilateral trade imbalances. (Many of the highest tariff rates were temporarily paused a week later, leaving a 10 percent rate on most of the world for now.) Apart from their economic and financial fallout, these measures are unlikely to significantly reduce the overall US trade deficit, given (a) the substantial difference in domestic saving rates between the United States and large trading partners; (b) retaliatory measures taken by many countries; and (c) trade diversions and exchange-rate adjustments that will counter some of the effects of the tariffs.

It remains to be seen whether investment in the United States will pick up to a significant extent, given the uncertainty about the extent and duration of the trade restrictions currently in place. Moreover, labor-intensive manufacturing industries will have a hard time regaining a footing in the United States, given the falling costs of automation and persistent labor cost differentials with emerging markets and developing countries. A major plank of a strategy to boost employment and long-term growth should therefore lie in a speedy resolution of trade negotiations and a reduction in bilateral tariff rates between the United States and its largest trading partners, particularly Europe, Japan, and China.

The United States should also focus its industrial policy on boosting innovation, protecting or regaining technological advantages, especially in artificial intelligence (AI) and quantum computing, preserving access to supply chains and export markets, and maintaining strategic production capacities, preferably in conjunction with its European and Asian allies.

Beyond trade policies, there is a much larger agenda to strengthen the growth fundamentals of the US economy. This includes building a growing and better educated workforce that can translate AI and other innovative technologies into commercial products that can be sold in a global marketplace. Given the significant returns to scale in digital technologies, the United States should ensure that its institutions are strong enough to ensure a fair and transparent marketplace and combat monopolistic practices.

All of this would help the United States preserve its productivity advantage vis-à-vis the rest of the world, a key condition for durable real wage growth and rising living standards. To ensure that gains are distributed broadly throughout society, the expiration of key provisions of the 2017 TCJA provides an opportunity to boost incentives for new investment and labor-market participation while generating additional revenues from higher incomes and economic rents.

Moreover, while the new administration has a critical view toward illegal immigration, cutting off the legal flow of well-educated foreign students and productive workers into the United States, a key ingredient for its past economic success, would be an unforgivable own goal.

Regain fiscal room to maneuver

Despite the projected increases of US government debt in coming years, the United States has been able to easily finance large deficits and is expected to do so in the future. However, the increasing amount of outstanding debt, as well as the rise in the average interest rate paid by the federal government, are constraining the budgetary room for new initiatives by the incoming administration. The share of discretionary spending—that is, spending not mandated by debt obligations or entitlement programs such as Social Security and Medicare—has already fallen from around 50 percent in the 1990s to below 30 percent today. As this share is projected to shrink further over the coming years, the trade-off between defense spending (which currently accounts for about half of all discretionary expenditure) and other priorities (such as infrastructure spending) is becoming stronger.

Everything else equal, reining in the fiscal deficit would therefore have a positive impact on long-term interest rates and crowd in private investment, a key ingredient for long-term growth. Although the creditworthiness of the United States is not yet in doubt, the increase in US government bond yields after the 2021 inflation scare, as well as the rise in bond yields after the April tariff announcements, has been a wake-up call, indicating a departure from the low-interest environment of the 2010s. It also increased the cost of private-sector investment, including higher mortgage rates that have contributed to a significant drop in new housing construction.

The first-best option to realize budgetary savings would be on the back of sustained robust growth, as discussed in the previous section, whereas deficit-financed tax cuts or spending increases would deepen the United States’ long-term fiscal quandary. Fiscal policy should instead focus on enhancing the efficiency of the tax system and reducing public expenditure—especially in the health sector, where the United States outspends other advanced economies by a large margin while achieving inferior outcomes.

However, imposing across-the-board spending cuts and labor-force reductions are not a proven tool to generate significant fiscal savings. They have a relatively small budgetary effect but a possibly significant impact on the government’s ability to function, which will eventually have to be rectified through new hirings. Given the demographic trajectory, there also is a need at some point for better targeting or changing the economic parameters of US entitlement programs (the “third rail” of US politics), but with continued dollar dominance, the United States would still have the space for a gradual phase-in of policy reforms.

Maintain deep and liquid financial markets

US financial markets are attractive to foreign investors because of their openness and underpinning by transparent and market-friendly rules established by US law. As a result, foreign portfolio holdings in US equities amounted to $13.7 trillion in 2023, and foreign investors owned $7.6 trillion in Treasury securities, equivalent to about a third of publicly held federal debt. Moreover, foreign deposits in the US banking system have steadily risen to about $8 trillion in 2024, highlighting the important role of foreign capital for the functioning of the US economy. Besides maintaining a welcoming framework for foreign investors, the United States will also need to ensure that financial market regulations remain effective and stay up to date with technological developments.

The more volatile geopolitical and economic environment has already tested the resilience of US financial markets, and both regulators and private entities should be prepared to deal with future shocks. As in other advanced economies, for example, US banking regulations have considerably tightened since the 2007–2009 global financial crisis; but the failures of Silicon Valley Bank and several other midsize institutions have revealed continued supervisory problems. US and European regulators were close to concluding an extension of the Basel Accord (Basel 3.1), but momentum has been lost given strong resistance by the financial industry on both sides of the Atlantic. Even if the new administration were unwilling to pursue negotiations within the Basel Committee, or planning to consolidate regulatory agencies, it must not lose focus on ensuring that banks remain well-run and adequately capitalized.

In a similar vein, there have been episodes in recent years when liquidity in US government bond markets collapsed, threatening to severely disrupt the workings of the global economy (with daily trading volumes in the Treasury bond market averaging $600 billion in 2023). Both the September 2019 repo crisis and the March 2020 meltdown required emergency intervention from the Federal Reserve system to keep the markets operational. Changes to the functioning of markets, including channeling a larger number of transactions through clearing agencies and improving transparency, should help reduce uncertainty during times of crisis, provided they are left in place by the new administration.

This, of course, assumes that there are no policy accidents, such as the US Congress not authorizing a debt ceiling increase, which could lead the United States to default on its government bonds and seriously undermine the US dollar’s standing abroad. Similarly, a forced change in the terms of US government bonds as has been proposed by some analysts, especially if directed at foreign investors, carries the risk of a large repricing of US financial instruments that could be traumatic for financial markets worldwide.

In the realm of financial regulation, the United States had until recently taken a conservative approach to innovative technologies such as stablecoins and cryptocurrencies. A 2022 report by the Financial Stability Oversight Council found that activities involving crypto assets “could pose risks to the stability of the US financial system if their interconnections with the traditional financial system or their overall scale were to grow without adherence to or being paired with appropriate regulation, including enforcement of the existing regulatory structure.”

The new administration has adopted a more welcoming approach, with several crypto proponents taking on key roles in US regulatory agencies. This pro-cryptocurrency stance may well lead to stronger innovation, but it could also contribute to heightened market fluctuations and uncertainties. Even under a lighter touch, new rules and regulations are likely to emerge from this transition phase. While this will pose some compliance challenges for companies, it will still be important to balance innovation with financial stability concerns. Introducing appropriate safeguards and maintaining a strong commitment to ethical practices will prove essential for helping businesses navigate the evolving landscape, build trust with consumers and regulators, and ensure the long-term success of digital payments.

By contrast, the Trump administration’s negative stance on the creation of a US central bank digital currency (CBDC) creates a potential risk to the dollar’s global standing. While there is indeed no clear use case for a CBDC at present, and adoption of retail CBDCs in most countries so far has been small, technological developments in this area are hard to predict. The United States might prefer to foster US dollar-based stablecoins rather than a CBDC to cement the dominant role of the dollar, but there is a risk that it could fall behind if a large number of other countries were to shift to CBDC-based settlement technologies. Moreover, given the challenging nature of digital currencies, the United States would not be able to shape international regulations that promote the efficient use of CBDCs and address critical concerns related to money laundering, fraud, and consumer protection.

Strengthen relations with emerging markets and developing countries

As the United States and Europe vie to preserve their geopolitical primacy against the onslaught from Russia and China, it is important to keep in mind that the world’s demographic center of gravity has already begun to shift toward Africa, India, and Southeast Asia. The geopolitical weight of these regions is still relatively modest, but their economic role is expected to steadily increase due to powerful demographics. Compared to China, the United States has been slow to recognize the importance of intensified trade relations with countries that may relatively soon become key export markets for US companies and engines for global growth.

Not long ago, the United States and other industrial countries were the major source for development finance, including through bilateral aid and in their role as majority shareholders in the Bretton Woods Institutions. The results of this decades-long engagement were decidedly mixed, however. Numerous large emerging-market countries thrived after the crises of the 1990s, but loans to many developing countries turned sour as countries failed to sustainably generate increases in per capita incomes. Member countries of the Organisation for Economic Co-operation and Development (OECD) consistently missed their targets for grants and other development aid, and developing countries have accused the industrialized world of not providing adequate compensation for the damage caused by past CO2 emissions.

China has used this opportunity to project itself as a friend and partner for many developing countries. Deploying its ample foreign exchange reserves (which it has been keen to direct away from US Treasury bonds), China’s Belt and Road Initiative has financed investment projects in resource-rich and strategically located developing countries—surpassing one trillion dollars—deepening trade and political relationships in a way that the West has been unwilling to match, and making China the world’s largest debt collector. China has leveraged these relationships to secure access to critical minerals and set itself up as the market leader in their processing and refining, gaining geopolitical leverage against the United States in the event of a future trade war. China has also received considerable diplomatic support from developing countries for its policy of unification with Taiwan.

The United States and its Western partners should urgently contest China’s position as an informal leader of the developing world. There is space to do so, as many countries have been disillusioned by China’s self-interested motives, which have often left them with badly executed infrastructure projects and high debt that proved difficult to restructure. To be successful, however, the United States and its allies must increase the speed and volume of their engagement with developing countries, offering projects and loans that exceed those of Chinese lenders in quality while being competitive in cost and timeliness. The Trump administration should therefore advance the planned restructuring of the former US Agency for International Development (USAID) under the State Department or the Development Finance Corporation (DFC), resuming support for partner countries in need of economic assistance.

Moreover, given tight national budget constraints, the Bretton Woods institutions should be more tightly integrated in a strategy to support friendly countries in the developing world. To do so successfully, they will need to remain firmly under Western control. However, to preserve their legitimacy as international institutions, they will need to stay focused on their essential mandates, which still enjoy widespread support.

However, the past few decades have shown that a strategy based merely on loans and development aid is not enough. Developing countries also require better market access to boost exports and raise their growth trajectories. While this will be hard to legislate both in the United States and Europe, there could be significant long-term benefits from a gradual market opening. First, it would preempt Chinese companies from cornering markets in countries with strong population growth, and second, pressures for migration could diminish as income in source countries would rise over time. Taking the long view, healthy trade and investment relations with the dynamic economies of tomorrow would benefit the standing of the US dollar.

Finally, the use of sanctions as a tool to achieve geopolitical objectives is a double-edged sword, and they should be used in a more targeted and sustained manner. The primacy of the dollar enables the United States to effectively exclude targeted individuals and economies from the global financial system. However, the effectiveness of sanctions declines over time as actors find ways to circumvent them; at worst, the broad application of sanctions against other countries can lead to a reorientation of global trade and financial relations that could undermine the dollar’s preeminence. For example, the desire of BRICS countries to develop alternatives to the use of the dollar may be inconsequential at present, but it could eventually become one of many factors that relegate the dollar to a less dominant position in global payments and reserve arrangements.

Preserve military superiority

The US National Security Strategy (NSS) recognizes China as a major national security challenge, emphasizing its ambition and capacity to alter the rules-based international order. As a result, the 2022 National Defense Strategy (NDS) focuses on bolstering US deterrence against China, with a strong emphasis on collaboration with allies and partners. Russia also poses a direct threat to US and transatlantic security, particularly in light of its invasion of Ukraine and the resurgence of traditional warfare in Europe. Additional challenges include threats from North Korea, Iran, and terrorist organizations as well as the rise of authoritarian powers, disruptive technological advancements, global economic inequality, pandemics, and climate change.

To preserve its power, strengthen deterrence, and build an enduring advantage, the United States should better integrate its military efforts with the other instruments of national power, such as economics and diplomacy. In an era defined by strategic competition and the rapid diffusion of disruptive technologies, preserving technological superiority is essential. This requires robust investment in research and development, particularly in innovative technologies like advanced weapons systems, satellites, AI, autonomous systems, and human-machine teaming to enhance the efficiency and effectiveness of US military forces.

The US defense budget, which was $816 billion in 2023 (see Figure 6), constitutes about 40 percent of global military spending and is projected to increase by 10 percent by 2038 (after adjusting for inflation), reaching $922 billion (in 2024 dollars), according to the CBO; 70 percent of that increase would go to compensate military personnel and pay for operations and maintenance. However, defense spending comprises 3.5 percent of US GDP, down from 5.9 percent in 1989, and 13.3 percent of the federal budget compared to 26.4 percent in 1989 (see Figure 7).

Figure 6. US military spending has increased sixfold from 1980 to 2023 (in billions of dollars)

Figure 7. US military spending has remained steady as a percentage of GDP but fallen as a share of federal spending (1980–2023)

During the first Trump administration, the US defense budget saw significant increases focusing on military modernization and development of new technologies, as well as the creation of the Space Force as a new branch of the military aimed at addressing emerging threats in space. The second Trump administration will likely focus on increasing defense budgets as the “peace through strength” doctrine advocates for a robust military presence to strengthen deterrence.

Aligning defense spending with the goals of the NDS requires prioritization of investment in nuclear modernization, missile defense and defeat programs, and resource allocations across air, sea, and land forces in line with strategic objectives, ensuring the efficient use of budgetary appropriations with a focus on the quality of military capabilities over quantity.

This effort would help sustain the global dominance of the US dollar by deterring geopolitical challenges and ensuring stability in international financial and trade systems, minimizing economic coercion, and reassuring global investors of the security and profitability of the US market. The US Navy plays a crucial role in securing global trade routes by keeping sea lanes open, facilitating the free flow of goods and capital. Additionally, strategic alliances and security arrangements with key oil-producing nations, particularly the Gulf states and Saudi Arabia, reinforce the petrodollar system, sustaining global demand for the US dollar in energy markets. Furthermore, US military and geopolitical strength underpin the credibility of economic sanctions, a critical tool of financial influence and dollar dominance.

Leverage military alliances

The 2022 US NSS emphasized alliances and partnerships as fundamental aspects of the US foreign policy to maintain a competitive edge in an era of strategic competition, including military collaboration, economic partnerships, and diplomatic interactions throughout the transatlantic and Indo-Pacific regions. In this aspect, strengthening relationships with key partners such as India and Japan is regarded as pivotal in addressing China’s increased influence. This includes joint military exercises, as well as sharing intelligence, and combining resources for defense initiatives.

The United States should collaborate with allies to create a secure environment by prioritizing comprehensive resilience in a community that can effectively respond to any security or defense crisis posed by adversaries, authoritarian regimes, malign state and nonstate actors, disruptive technologies, or threatening global events such as pandemics and climate change.

To bolster national security, strengthen military capabilities, foster economic resilience, and maintain global competitiveness, the US administration must prioritize a robust division of labor and responsibilities across key strategic areas, such as manufacturing, military operations, supply chain management, and weapons production. The division of labor with allies and partners enhances further efficiency and productivity, allowing partners to focus on their strengths, streamlining processes in specialized manufacturing companies while reducing costs, and providing access to advanced technologies critical for national defense. Pooling resources and know-how enables allies to share advanced technologies, coordinate and streamline production processes, and build strategic stockpiles.

Collaboration with allies plays a vital role in fostering resilient and redundant supply chains that are critical for diversifying sources of critical materials and reducing vulnerabilities in the face of global disruptions; it also fortifies national defense while promoting mutual security and economic stability. Securing critical supply chains is crucial to safeguard national security and the US administration should develop a National Defense Industrial Strategy to coordinate efforts across government agencies to prioritize resilience and protect the integrity of supply chains critical to defense manufacturing and operations.

Some elements of the above are already in place but need further enhancement and stronger commitment, particularly by leveraging economic opportunities. The United States must align economic and security interests within its alliances. Strengthening NATO’s economic coordination can ensure allies remain integrated into the dollar-based system through trade and defense procurement; it also can promote dollar-based investments in European defense, especially as European NATO partners are committing more resources to the defense sector.

Similarly, an expansion of international alliances and cooperation with a larger number of countries would reinforce dollar-based trade conditions in security agreements and promote standardization with US financial institutions among Indo-Pacific partners. Recommended actions include:

• Expanding the AUKUS security pact (with Australia and the United Kingdom) and the role of the “Quad” alliance (including Australia, India, and Japan) in economic security.
• Enhancing naval cooperation in key maritime regions and with nations that control strategic trade chokepoints.
• Increasing coordination through a strategic allied council, as warranted.

In addition, effective communication would be essential to articulate the nature of the threat with clarity and promote credible narratives to safeguard the information space against propaganda campaigns, cyber influence operations, and the weaponization of social media. Proactive information strategies devoted to strengthening partnerships with like-minded democratic nations can protect public trust and reinforce resilience.

Assumptions and alternatives

This strategy paper is based on several assumptions that are central to its proposals and the period over which they should be implemented.

• First, there is no fundamental change in the principal characteristics of the Chinese economy, namely a heavy degree of state intervention and a closed capital account. India is also assumed to maintain capital account restrictions, and Europe will not implement a single capital market for some time. A change in these conditions could prompt some reserve flows into the respective currencies, but it would still be deemed unlikely that capital markets in these countries would evolve to a point where they could compete with the United States in depth and liquidity.
• Second, US deterrence in key military theaters (Europe, South China Sea, Korean Peninsula) will remain effective for the time being, and the United States does not get drawn into an active military conflict, for example, over Taiwan. Otherwise, the United States would have to shift toward a more decisive and short-term war strategy.
• Third, the United States remains dominant, or at least competitive, in developing critical technologies such as AI, microchip production, cryptology, and communications. It will be able to defend strategic assets, such as major military bases, carrier groups, space technology, or command, control, and communications (C3) infrastructure, against physical or virtual attacks. Failure to do so would make the United States more dependent on the technological capacities of its allies, requiring more effective coordination and systems integration that would be hard to achieve over a short time horizon.
• Fourth, another important assumption is that the new administration will also realize that the United States is indeed lacking the resources to remain the sole military hegemon for much longer. Adopting a more realistic approach will not come without challenges to its own credibility, as the wider US public has yet to realize that technological progress has narrowed the military advantage held by the United States over its competitors, that the room for discretionary government spending could narrow dramatically over the coming years, and that US manufacturing would not be capable of supporting a major military conflict for long. In the event of a future conflict, public support for the Trump administration, or for any US government down the road, could evaporate quickly if these expectations were not corrected through public communication in good time.

The new administration may fear that collaborating more closely with political allies, including the necessary compromises it would require, could lead to a perception that foreign interests are driving US policies. At the same time, the increasing cooperation between China, Russia, and North Korea highlights that the Trump administration would not be able to focus on China alone, as it has stated in the past, while leaving its European partners to deal with Russia entirely by themselves. On the contrary, the lack of an effective European nuclear deterrence might force Europe to increasingly fulfil Russia’s geopolitical demands to avoid armed conflict, potentially allowing Russia to undermine political and economic relations between the United States and Europe. Since Europe remains the United States’ largest trading and financial partner by a significant margin, it should be clear that such a strategy would be entirely self-defeating.

As for some of the tariff and exchange-rate pronouncements by the Trump administration, it is important to keep in mind that an economy with free capital movements and an independent monetary policy cannot pick a specific value for its foreign exchange rate (the “impossible trinity” of economics). In the case of the United States, this means that an imposition of tariffs to weaken the dollar, as has been floated by President Donald Trump during the election campaign, will not change the fact that the US dollar exchange rate remains market determined as long as the United States allows unrestricted capital inflows and outflows and has an independent Federal Reserve. In particular, the exchange rate of the dollar would continue to reflect differentials in saving rates among major trading partners, over which the United States has limited influence.

If the new administration were serious about attempting to depreciate the value of the dollar, it could only do so by undermining its appeal as a safe asset to foreign investors. One way to do this would be to renege on the US commitment to free and open trade and capital flows, which have formed the basis for robust growth over many decades. Tampering with the independence of the Federal Reserve, let alone with the US legal system more broadly, could trigger significant financial volatility, including increases in the market interest rate on US government debt, major stock market losses, and a shock to the US economy that could dwarf any gains from what might be considered as a more favorable exchange rate. The self-defeating nature of such moves would quickly become evident; but if confidence is lost, it would be difficult to restore.

Indeed, there are few credible alternatives for any US administration other than leveraging the strength of the US economy and its currency against the growing autocratic threat while operating in close alliance with other democracies.

• Withdrawing into self-isolation, as in the 1930s, could provide a false sense of security in today’s interconnected world. It would undermine the global dominance of the dollar by weakening its economic and strategic influence as allies and partners may hedge against US unpredictability, seeking alternative financial systems to diversify. Moreover, such a policy would allow other countries to occupy geostrategic positions to the detriment of the US economy and national security.
• Similarly, accommodating strategic opponents like Russia or China would undermine trust in US leadership and lead to strategic losses in all theaters. Without the United States providing strong global leadership, other countries would not be able to thrive without catering to the interests of the other powers, and the United States could enter a phase of economic decline.

Finally, the most likely alternative to the strategy outlined above would be that the United States remains mired in a polarized political environment that leads to short-sighted policy decisions that fall short of the strategic challenges ahead. Most importantly, the United States would not be able to improve its fiscal situation and eventually would lack the resources needed to maintain its strategic financial and economic dominance and the superiority of the dollar. The continued erosion of US power might not be catastrophic for the United States itself, but it could trigger bouts of political instability and economic volatility around the globe, with negative consequences for the role of the US dollar and the welfare of US citizens.

Conclusion

This paper outlines a strategy for the United States to maintain dollar dominance. It argues that the United States will likely remain the world’s largest economic and military power, though it will face increasing difficulties in pursuing its strategic objectives on its own. There is a risk of military overreach as US defense spending is competing with other public expenditure priorities. Additionally, high fiscal deficits could further weaken the exorbitant privilege that has enabled the United States to sustain large fiscal and currency account deficits in the past.

The stakes are now higher compared to eight years ago, when Trump first took office, both because of the run-up in public debt during that period and because Russia and China are now more closely aligned in trying to weaken the democratic West. While reining in the fiscal deficit and boosting the US economy’s growth potential, the administration should proceed cautiously, preserving economic and diplomatic relations with existing allies. The United States should also strengthen partnerships with emerging markets and the developing world, where countering China’s efforts to co-opt countries into its economic and political orbit should become a strategic priority.

Executive editors

Frederick Kempe
Alexander V. Mirtchev

Editor-in-chief

Matthew Kroenig

Editorial board members

James L. Jones
Odeh Aburdene
Paula Dobriansky
Stephen J. Hadley
Jane Holl Lute
Ginny Mulberger
Stephanie Murphy
Dan Poneman
Arnold Punaro

The Scowcroft Center is grateful to Frederick Kempe and Alexander V. Mirtchev for their ongoing support of the Atlantic Council Strategy Paper Series in their capacity as executive editors.

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The post Why the US cannot afford to lose dollar dominance appeared first on Atlantic Council.

Today, Washington is once again chattering about the possibility of a currency deal. This time, the venue may move south for what Trump’s incoming chairman of the Council of Economic Advisers, Stephen Miran, described as a “Mar-a-Lago Accord.” In a September report, Miran declared the overvaluation of the US dollar responsible for the “roots of economic discontent.”

Several in Trump’s inner circle have expressed an interest in devaluing the dollar to address the US trade deficit. Weak-dollar advocates believe that the strong dollar creates international trade imbalances, handicapping US manufacturers. A weaker dollar would make US exports more competitive.

But there’s a key difference between the countries that would gather in Palm Beach today and the group that met in New York in the 1980s—the countries that comprise the US trade deficit.

How will this different constellation impact any potential negotiation? It makes a deal much more complicated.

Miran and others want to use tariffs to get countries to the negotiation table. If these countries are worried enough about the cost of tariffs, Miran thinks they will be willing to make major changes to their currencies that they’d never otherwise consider. But Miran doesn’t stop there. He knows tariffs alone aren’t enough of a stick, so he thinks it is time to put the US security umbrella up for debate.

Miran argues that the security zone should be financed by the beneficiaries, and this can be leveraged to both depreciate the dollar and to mitigate the inflation effect of tariffs. Countries in the security zone should “fund it by buying Treasuries,” especially century bonds, and “unless you swap your bills for bonds, tariffs will keep you out.” US Treasury Secretary Scott Bessent has also discussed the idea that countries can enjoy shared defense as long as there are shared currency goals, while tariffs can be used for negotiation of terms. This administration seems at least open to the idea of linking the US security umbrella with the restructuring of the global trade system to benefit the United States.

The problem, of course, is that the countries the United States has the highest trade deficits with are no longer allies dependent upon this security umbrella. In 1985, the United States provided the security guarantee for France, Germany, Japan, and the United Kingdom. These signatories of the Plaza Accord hosted nearly a fourth of all overseas US military bases in the 1980s. Neither China, nor Mexico, nor Vietnam rely on the US military in 2025.

Without the incentive of shared security, are tariffs enough to push non-allies towards a currency agreement? It doesn’t seem to be for China. A major reason for resistance is that Beijing sees Japan’s experience after the Plaza Accord as a cautionary tale.

The “Japanification” of China?

The Plaza Accord forever altered the trajectory of Japan’s economy. The appreciation of the Japanese yen contributed to bursting Tokyo’s asset bubble and the lost decades of economic stagnation. At least, that is the lingering impression of the 1985 currency agreement in China.

There are certain similarities between Japan’s economic slowdown in the 1990s and the one that China is currently experiencing, such as deflation, low consumer demand, and capital flight. In January, China’s thirty-year government bond fell below that of Japan’s for the first time, and over the weekend, China’s inflation dropped below zero again. China is willing to go to lengths to avoid a “Japanification” of its own economy, including refusing to appreciate the renminbi against the dollar, even if it means weathering a protracted trade war.

China has previously raised concerns about the US dollar’s role as the dominant reserve currency and wouldn’t necessarily complain if the dollar’s preferential position in foreign reserves and global finance weakened. But with persistently sluggish consumer demand, China is still counting on the export sector to help drive economic growth in 2025. Beijing won’t want to risk any changes to the renminbi that would decrease the competitiveness of its exports in the midst of a trade war.

The idea of a Mar-a-Lago Accord is going to appeal to Trump. After all, he was the man who bought the Plaza Hotel in 1988, right after the famous agreement. But getting there is going to require more than just tariffs and a threat to remove security guarantees. China is going to have to see what’s in it for them. And that, so far, remains a mystery.

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Jessie Yin is an assistant director with the Atlantic Council GeoEconomics Center.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Meeting in Mar-a-Lago: Is a new currency deal plausible? appeared first on Atlantic Council.

The declining share of the USD in global reserves

The IMF conducts a regular survey of Currency Composition of Official Foreign Exchange Reserves (COFER). Its latest COFER report shows that in the first quarter of 2024, the share of USD sits at $6.77 trillion—54.8 percent of the total official foreign exchange (FX) reserves of $12.35 trillion, or 58.9 percent of allocated FX reserves where currency breakdowns having been reported to the IMF. This is a noticeable fall from the 71 percent share for USD in 2001. Basically, the decline in the USD share has been driven by efforts by central banks to diversify their reserves into a wider range of currencies—a move facilitated by improvements  in financial markets and payment infrastructures in many countries. It is important to note that the share of USD would be lower if gold were included in global reserves.

Since the global financial crisis in 2008, the world’s central banks have increased their gold purchases in an attempt to manage heightened financial system uncertainty. Doing so has pushed gold prices up by 138 percent over the past sixteen years to reach the current record highs of over $2,600 per ounce. Gold buying has accelerated further in recent years as part of a growing popular demand. In 2022 and 2023, central banks purchased more than one thousand tons of gold per year, more than doubling the annual volume of the previous ten years. Purchases have been spearheaded by the central banks of China and Russia, followed by several emerging market countries including Turkey, India, Kazakhstan, Uzbekistan, and Thailand. In particular, the People’s Bank of China has raised the share of gold in its reserves from 1.8 percent in 2015 to a record 4.9 percent at present. At the same time, it has cut its holding of US Treasuries from $1.3 trillion in the early 2010s to $780 billion in June 2024.

Gold holdings, valued at market prices, account for 15 percent of global reserves. As a consequence, the share of the USD in total global reserves including gold would fall to 48.2 percent—instead of 54.8 percent of global foreign exchange reserves. The declining USD share suggests that while the USD is still the preferred currency most used by central banks for their reserves, it has been losing market share. It is not as dominant in the global reserves arrangement as it still is in trade invoicing, international financing, and FX transactions, according to the Atlantic Council’s Dollar Dominance Monitor.

Implications of the declining share of the USD in global reserves

Several reasons have been advanced to explain the growing demand for gold. For the general public, factors including hedging against inflation and/or against political and geopolitical risks, as well as positioning for expected US Federal Reserve rates cuts, appear reasonable. The central banks buying gold have also mentioned their desires to diversify their reserves portfolios, de-risking from vulnerability to sanctions risk from the United States and Europe. This sense of vulnerability has become acute for some countries in conflict or potential conflict with the US/Europe, after the West imposed substantial sanctions on Russia following its invasion of Ukraine. Decisions to immobilize overseas reserve assets of the Bank of Russia, subsequently appropriate the interest earnings of those assets, and threats to seize assets outright to help pay compensation to Ukraine proved especially unsettling.

In response, central banks have moved into gold in a way to diminish sanction risks. They can take physical possession of the gold they have bought and kept it in domestic vaults—instead of leaving it at Western financial institutions such as the US Federal Reserve, the Swiss National Bank, or the Bank for International Settlements, where gold is subject to Western jurisdiction. If the likelihood of geopolitical confrontation heightens, it follows that the declining trend in the share of the USD in global reserves will persist. This is consistent with the de-dollarization trend whereby a growing number of countries have developed ways to settle their cross-border trade and investment transactions in local currencies. Doing so chips away at the USD’s dominant role in the international payment system, as well as motivating countries to hold some reserves in each other’s currencies.

While the declining share of the USD in global reserves could continue to unfold gradually, as in the past two decades, central banks’ demand for USD for their reserves would eventually fall to a critical threshold. The US national saving rate is also likely to stay low and remain insufficient to cover domestic investment, leading to persistent US current account deficits. The combined effect of these trends in addition to falling foreign central bank demand for USD would constrain the US government’s ability to issue debt to finance its budgetary needs.

This constraint could become binding, a turning point heralded by sharp reductions in foreign official demand for US Treasuries. In that case, USD exchange rates would have to fall and interest rates to rise, simultaneously and in sufficient magnitude, to improve the risk-return prospects of US government debt and attract international investors. Any increase in US interest rates would be very problematic as interest payments on government debt have already become a burden, and are estimated to take up more than 20 percent of government revenue by 2025. They are threatening to crowd out other necessary public priorities including national defense, dealing with climate change, infrastructure, and human services. These developments would make the political fight over budgetary resources for competing needs even more antagonistic, and the important task of getting government deficits and debt under control more intractable. Both factors would ultimately put the US fiscal trajectory on an unsustainable path and threaten global financial stability—a risk not easily addressed given the deepening geopolitical contention.

Hung Tran is a nonresident senior fellow at the Atlantic Council GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Going for gold: Does the dollar’s declining share in global reserves matter? appeared first on Atlantic Council.