A currency at the centre of global finance
The US dollar remains deeply embedded in the international economy. It appears on one side of approximately 90% of cross-border transactions, represents close to 60% of foreign central bank reserves and accounts for nearly two-thirds of global debt.
This demand allows the United States to borrow at lower rates and gives Washington considerable influence over international finance. Economists commonly describe these benefits as an “exorbitant privilege”.
Countries explore alternatives
Debate about de-dollarization has intensified as central banks increase their holdings of assets such as gold. China and Russia are also developing payment networks designed to process transactions without relying on the dollar.
The shift has reached strategic trade routes. During the spring, some ships reportedly crossed the Strait of Hormuz after paying fees in Chinese yuan.
A sudden end to the dollar’s global role remains unlikely. Nevertheless, three economists have examined how households, businesses and governments could be affected if its dominance gradually weakened.
Trade could become more expensive
Maury Obstfeld, senior fellow at the Peterson Institute for International Economics, explained that the dollar benefits from “network externalities”, meaning its usefulness increases because it is already accepted almost everywhere. “You know, I use the dollar because everyone else uses the dollar,” he said.
Zoe Liu, senior fellow for China studies at the Council on Foreign Relations, compared the currency with a common international language. “I don’t need to speak Swahili, and you know people who speak Swahili don’t need to speak Japanese or Chinese; we can all speak English in order to communicate,” she said. “And that is actually the role of the dollar at the most basic level.”
An Argentine company can trade with a Turkish business without keeping Turkish lira, just as businesses in Turkey, Cambodia and Madagascar can avoid maintaining reserves in every currency used by their commercial partners. The dollar provides a shared settlement instrument.
“The entire world benefits from having the dollar as a global currency,” Obstfeld said. Without a similarly trusted alternative, companies would face greater exchange-rate exposure, higher transaction costs and more difficulty agreeing on payment terms.
“Every single transaction becomes not just more costly, but maybe not even happens because [they] cannot agree on which currency to take,” Liu warned.
American borrowing costs could rise
A decline in global demand for dollar-denominated assets would also affect financing inside the United States. “The baseline note is that America’s borrowing cost will go up,” Liu said.
The US government carries about $31 trillion in public debt. Foreign governments, individuals and institutional investors help finance that borrowing by purchasing dollar assets, often at comparatively low interest rates.
If demand weakened, the Treasury could be required to offer higher returns. The consequences would extend beyond federal finances. “Not just for the government, but for everybody,” Obstfeld said.
More expensive government borrowing could translate into higher rates for mortgages, vehicle financing, student debt and business loans, eventually affecting routine financial decisions made by American households.
Washington could lose financial leverage
Dollar dominance also strengthens the United States’ ability to impose economic sanctions. Because international payments frequently involve the dollar or a major American bank, Washington can restrict targeted governments, companies and individuals from accessing the global financial system.
“And that means that when the United States chooses to, it has the ability to impose sanctions that cut people off from global finance,” said Jay Shambaugh, professor of economics and international affairs at George Washington University.
This authority has been used against terrorist organizations, governments seeking nuclear weapons and Russia following its invasion of Ukraine. “If we lose the role of the dollar, we lose that sanctions ability,” Shambaugh said.
US policy may pose the greatest threat
None of the economists expects the dollar to surrender its position soon. Obstfeld observed: “It’s not as if the world would suddenly come to an end.” Shambaugh added: “But I think it’ll be different in important ways,” while Liu warned: “Eventually we will feel it in our daily transactions.”
Alternatives to the dollar remain costly and difficult to establish. However, countries may accept those expenses if they believe the United States is misusing its financial influence.
“But if people see us as irresponsible with our power, it makes it just much more likely that they will find ways to move money that don’t touch the dollar,” Shambaugh said. “It’s expensive to do those things, but if the U.S. gives countries a reason to do it, you could see us walking towards that less dollarized world.”
The dollar earned its international status through confidence in the US economy, reliable financial regulation, an independent central bank and a long record of meeting debt obligations. Its future could therefore depend less on a competing currency than on domestic policy.
“I guess the core message is that the only enemy to the U.S. dollar is not a rival currency,” Liu said. “It’s our own fiscal responsibility itself.”
