Is the Dollar Losing Its Edge?

The Issue:

Underpinned by the economic and institutional strength of the United States, the dollar has been the world’s dominant currency since the Second World War. The prevalence of the dollar in international markets, together with confidence in the stability and soundness of the US economy, have made the US dollar a safe haven for international investors in times of economic crises and heightened uncertainty. And dollar dominance has contributed considerable economic and geopolitical benefits to the United States. However, concerns have been expressed over the years that the dollar could lose its edge, and such concerns have mounted in recent months in the context of a spike in economic policy uncertainty. New analysis presented in this memo considers whether there are signs of changes to the way in which the dollar is regarded — and what this could mean for the dollar’s dominant role.

Several dimensions of US economic policy have been moving in directions that undermine the dollar’s dominance.

The Facts:

• Multiple measures show that the dollar still holds the leading position among global currencies, although its role has diminished somewhat over the years. In 2025, 57 percent of central bank reserves across the world  were held in dollar-denominated assets, down from 71 percent in 1999. With respect to international trade, 54 percent of global exports are invoiced and settled in dollars. Most impressively, the dollar is involved in 88 percent of all currency trades, dominating in all major foreign exchange (FX) markets (spot and forward), as the dollar is effectively used as a vehicle currency for FX transactions even for non-US dollar currency trade (see here). These dollar shares remain well above those of rival currencies. The runner up is the euro: 20 percent of international reserves are held in euro-denominated assets, 30 percent of exports are invoiced in euros, and the euro is involved in 31 percent of FX transactions. The corresponding figures for the Chinese renminbi are 2 percent, 4 percent and 7 percent, respectively (see here).
• What explains the dollar’s dominant position? Clearly, the dollar has benefited from the scale of the US economy and its central role in the global trade and financial system. But there are deeper factors too that have supported the dollar’s position even as the Euro emerged as a potential rival and the US economy’s sheer size advantage has diminished with the rapid growth of other countries like China. (China now accounts for 14.6 percent of global goods exports compared to 8.5 percent for the US). A key factor underpinning the dollar’s continued dominance is the openness, breadth and depth of US financial markets — particularly the market for US treasury securities, which remains by far the largest and most easily tradeable bond market in the world. The dominance of the dollar is also bolstered by confidence in the rule of law in the US, including the protection of financial contracts, and confidence in US economic management, both of which reduce the risk of holding dollars and dollar-denominated assets. By contrast, the euro lacks a deep base of safe assets denominated in euros and its capital markets are fragmented and relatively shallow as compared to the United States. Use of the Chinese RMB is discouraged by the continuing presence of capital controls, lack of full convertibility and questions about the rule of law.
• One dimension associated with the dollar’s dominance has been that dollar-denominated assets have acquired a safe-haven status. The dollar’s dominant role as a currency, combined with the underlying strength of the US economic framework, has meant that when the global economy hits a major spike in uncertainty like the Iraq war, the 2008 global financial crisis or the COVID pandemic, investors have sought safety by flocking to dollar-denominated assets. During such episodes, increasing demand for US Treasury securities bids up their price putting downward pressure on yields and the value of the dollar tends to appreciate with the increase in demand for the currency from investors (see here). At the same time, inflows into the dollar help to preserve dollar liquidity and calm US markets, reducing crisis risk, and further reinforcing the dollar’s safe-haven reputation. Strikingly, this rush to the safety of the dollar has happened even during times when the main source of global financial uncertainty originated within the US itself — such as the 2008 global financial crisis, which was sparked by a downturn in the US housing market and consequent collapse of the mortgage-backed securities market.
• However, there has been a startling recent break in the pattern associated with the safe-haven status of the dollar. Following the Trump administration’s decision to sharply escalate tariffs on imports from trading partners, the accompanying spike in policy uncertainty was associated with a sharp downward movement of the dollar, in the context of a jump in US bond yields, the opposite of the usual pattern.  We investigated this phenomenon empirically by analyzing how past moments of heightened financial or economic turmoil (as captured by a measure of uncertainty) have affected the value of the dollar after taking into account the effect of other factors. Between the late 1990s and 2025, we find that increases in uncertainty have a statistically significant impact on an index of dollar exchange rates (DXY) during 10 periods (see chart). For the majority of these episodes, increases in uncertainty led to an appreciation of DXY, as would be expected from a safe-haven effect with investors flocking to dollar-denominated assets and demand bidding up the value of the dollar. However, we find evidence of two recent periods when this effect was reversed: greater uncertainty led to a weakening of the dollar in early 2017 at the start of the first Trump administration and in the most recent four-month period. (Regression results are shown here.)
• A move away from dollar dominance would erode the considerable economic, financial and geopolitical benefits that the US has gained from being the issuer of the world’s dominant currency. The fact that US Treasury securities have long been seen as the safest of assets has meant that American borrowers, including the federal government, have generally been able to borrow more debt at rates lower than otherwise. Moreover, the dollar-pricing of international trade means United States exporters and importers avoid currency hedging costs (that is, the need to buy protection against the possibility that currency movements could adversely affect the domestic value of the currency received in a transaction). For US consumers, the effect of dollar dominance on the dollar exchange rate has made it easier to buy foreign goods at lower cost. Finally, dollar dominance has also given the United States a valuable foreign policy tool as it has repeatedly applied dollar-based financial sanctions, along with trade-based measures, against countries like Iran, Russia and Syria. For example, after the invasion of Ukraine in 2022, such “economic statecraft” measures included exclusion of major Russian banks from the SWIFT international payments system, the freezing of offshore assets of prominent Russian individuals, and the freezing of Russia’s international reserves.
• Several dimensions of US economic policy have moved in the direction of undermining the very factors that have helped to maintain the dollar’s dominance, a trend that seems to have amplified in recent months. Persistently high government deficits and an expanding government debt have made the United States an outlier among advanced economies and erode confidence in the country’s economic management. Indeed, with the weakening US fiscal position, all the major credit rating agencies have downgraded the US sovereign credit rating below the top rung, including most recently by Moody’s. US trade openness has started to reverse — with recent tariff wars and with policy reversals adding a major twist of uncertainty. The independence of the Federal Reserve — one of the pillars supporting confidence in the soundness of US economic management — has come under stress. And proposed changes to the way the US taxes foreign holdings of US assets —including a proposal in the House reconciliation bill to impose additional taxes on companies and investors from countries deemed to have punitive tax policies — have raised concerns that could fuel a retreat from US assets. Moreover, repeated use of trade and financial sanctions for geopolitical purposes has added to incentives to some countries to look to alternative non-dollar stores of wealth and means of transactions. For example, there has been an increase in central bank interest in holding gold as part of their international reserves following the economic sanctions imposed in response to Russia’s invasion of Ukraine.