Liza Poliakova, University of Oxford
It was the Bretton Woods system of 1944 that established the dollar as the world’s dominant reserve currency. For decades after, dollar hegemony has been the bedrock of the global economic order, an ‘exorbitant privilege’ so entrenched it appeared immutable. But this paradigm is now under threat. Once a fringe hypothesis, de-dollarization, defined by the head of global macro research at J.P Morgan as ‘changes in the structural demand for the dollar that would relate to its status as a reserve currency’, has crystallised into a central concern in international finance. This declining long-term use of the dollar and its lower transactional dominance in FX volumes has largely been driven by two convergent forces: the geopolitical weaponization of dollar-centric financial networks and the emergence of alternative digital payment infrastructures. This shift away from greenback dominance does not necessarily promise a clean transition to a new currency anchor, but a potential world of fragile monetary multipolarity or ‘neo-Cold War biopolarity’.
With ‘US allies hedging against a post-dollar world’, Dennis Snower, Research Fellow at Saïd Business school, outlined the six critical pillars necessary for maintaining dollar dominance: macroeconomic stability, deep liquid markets, central bank independence, capital mobility, the rule of law, and geopolitical trust. Each factor is increasingly under threat. Unpredictable fiscal policy, punctuated by debt-ceiling brinksmanship, has chipped away at perceptions of U.S. macroeconomic stewardship. Political pressures on the Federal Reserve and the ad hoc use of executive power to freeze assets or impose tariffs have undermined institutional independence and the consistent application of law. Most recently, the aggressive deployment of financial sanctions has served as a stark negative incentive for rival nations and even allies to seek insulation from the dollar system. This ‘weaponization’ acts as a powerful push factor, demonstrating that access to dollar liquidity can be revoked, thereby incentivizing the creation of parallel systems.
Positive pull factors are enhancing the credibility of alternatives. The most significant empirical evidence of de-dollarization appears in three key areas: central bank reserves, commodity markets, and the U.S. Treasury market. The dollar’s share of global foreign exchange reserves has declined to a two-decade low of just under 60%. While this is not unprecedented (indeed, the dollar’s share was lower in the early 1990s), the composition of the shift is telling. Currency composition of foreign exchange reserves (COFER), data compiled by the IMF, found that the aggregate share of the US dollar globally in foreign exchange reserves has fallen from above 70% in 2000 to 58% in 2024. A primary beneficiary has been gold, whose share in emerging market (EM) central bank reserves has more than doubled in the past decade, led by strategic accumulations by China, Russia, and Turkey. This is part of a broader flight to a neutral, non-sovereign asset amidst distrust of heavily indebted fiat currencies, particularly the dollar.
In commodity markets, the shift is more marked. Sanctions on Russian energy have catalysed a move away from dollar pricing, with Russian oil exports to India, China, and Turkey increasingly settled in yuan, rupees, or dirhams. This bypasses the dollar even without direct Chinese intermediary involvement. Similarly, Saudi Arabia’s prolonged consideration of yuan-denominated oil futures, while slow-moving, signals a profound reevaluation of the petrodollar pact that has underpinned dollar demand since the 1970s. This is accelerating perhaps the most concerning aspect of American fiscal dynamics: the stagnation of foreign demand for US Treasuries. The share of foreign ownership has fallen from over 50% during the Global Financial Crisis to around 30% today. While this reflects a complex mix of factors, including rising yields in other developed markets and slower growth in global reserves, it underscores a weakening of the dollar’s automatic funding advantage. The backdrop for foreign private demand has deteriorated, and official institutions are diversifying.
Technology is accelerating cross-border capital flight and de-dollarization. Cryptocurrencies and stablecoins empower a ‘grey economy‘ for sanctions evasion and illicit trade, eroding the dollar’s monopoly in the shadow financial system. More consequentially, the development of Central Bank Digital Currencies (CBDCs), like China’s e-CNY or the EU’s digital euro, aims to create streamlined, bilateral payment channels that bypass the dollar-based SWIFT network entirely. The rise of these parallel payment infrastructure systems is driving not only the move away from the dollar in cross-border transactions and central bank reserves, but also threatening further fragmentation of global financial coordination.
(Source: Moment of the Euro? Perceptions of US dollar Decline, European Parliament Monetary Dialogue Papers, October 2025)
Yet, proclaiming the dollar’s imminent demise is premature. As articulated in the LSEG’s article ‘dollar demise, or a storm in a trade tea cup’, the greenback retains formidable structural advantages: the deepest, most liquid capital markets in the world, a dominant role in trade invoicing, and a network of dollar-pegged currencies. Furthermore, there is no single, ready currency rival; the dollar remains strong, suffering from a ‘storm in a trade tea cup’. The euro’s share of reserves has stagnated, and the Chinese renminbi, despite vigorous promotion, constitutes a mere 2% of global reserves, hamstrung by capital controls and governance opacity. The currency shift is therefore likely to be not toward a new hegemon but toward a bifurcated or ‘non-traditional’ system. Research by Eichengreen et al. finds the decline in dollar reserve share as corresponding with a shift into a basket of smaller currencies, including Australian dollars, Canadian dollars, Singapore dollars, and South Korean won, driven by reserve managers chasing higher returns in more liquid offshore markets and managing larger ‘investment tranches’.
But this emerging multipolarity carries significant costs. The ‘safe haven paradox‘, as described in the EU Monetary Dialogue Paper, means the dollar appreciates during crises, which benefits global dollar holders whilst devastating U.S. export competitiveness. Additionally, as former Fed Chair Ben Bernanke has argued, dollar dominance imposes constraints: Fed policy carries exaggerated global spillovers, forcing it to consider international repercussions that may conflict with domestic goals. A world of competing currency blocs, with a dollar zone, a nascent yuan zone, and a digital grey zone, would likely be less stable, more susceptible to liquidity shocks, and less coordinated in a crisis
It appears, then, that the central question pertains not to the preservation of the dollar’s ‘exorbitant privilege’, but whether the world leaders will manage this transition toward a multipolar system through ‘renewed global cooperation or nationalist retrenchment’. The current path, driven by erratic fiscal policy, undermined international geopolitical trust and technological decoupling, points toward the latter: a fragmented system built on distrust. A managed transition will require coordinated international effort, acknowledging the diminishing returns of dollar weaponization and reinvigorating macroeconomic trust and institutional integrity. De-dollarization threatens not an exciting and egalitarian new order, but a likely volatile and costly fragmentation of the system of global finance itself.