Is the dominance of the dollar about to fade away? Donald Trump insists that “if we lost the dollar as the world currency . . . that would be the equivalent of losing a war”. Yet he himself could be the cause of such a loss. Reliance on a foreign currency depends on trust in its own soundness and liquidity. Trust in the dollar has been slowly eroding for a while. Now, under Trump, the US has become erratic, indifferent and even hostile: why would one trust a country that has launched a trade war on allies?
Yet, while outsiders might wish to diversify away from the dollar, they lack a compelling alternative. So, what, if anything, might replace its hegemony?
The dollar has been the world’s leading currency for a century. Yet the dollar itself replaced the pound sterling after the first world war, as the UK’s power and wealth declined. Objectively, the US is not declining as the UK was at that time: according to the IMF, its share in nominal global GDP was 26 per cent in 2024, against 25 per cent in 1980. Given the rise of China’s economy during that period, this is remarkable. The US also remains at the frontier of world technological development and the foremost military power. Its financial markets are still much the deepest and most liquid. Moreover, in the fourth quarter of last year, 58 per cent of global reserves were in dollars, down from 71 per cent in the first quarter of 1999, but far ahead of the euro’s 20 per cent. According to MacroMicro, 81 per cent of trade finance, 48 per cent of international bonds and 47 per cent of cross-border banking claims are still in dollars.