For decades, the dollar’s supremacy in global finance has felt like a given. It has been the default in everything from reserve holdings and trade invoicing to crisis hedging and portfolio construction. But that confidence is shaky. Conversations among investors have shifted from whether the dollar might weaken to how they should prepare for a world where it no longer sits at the centre.
The latest edition of the OMFIF Bulletin brings together perspectives from across the investment and policy spectrum to examine how macro, geopolitical and asset-specific trends are driving a reassessment of allocation strategies. Views are divided: some see resilience in the currency while others expect decline to be inevitable.
Contrasting views on the dollar’s dominance
On one side, Aaron Hurd, senior portfolio manager, currency group, State Street Investment Management, argues that the long periods of low risk and high returns from unhedged dollar exposure are unlikely to persist. He warns that we are entering a period where returns are weaker and risks higher, and that ‘this dollar free lunch era is over’. His view is echoed by Jens Søndergaard, currency analyst at Capital Group, who sees the real dilemma as whether the US still wants to lead, whether the world still trusts it to do so and whether any serious alternative to the dollar exists.
Adding to this sense of unease, Massimiliano Castelli, head of strategy and advice, sovereign institutions, UBS Asset Management, highlights this uncertainty through recent UBS survey data. The survey shows that 47% of reserve managers fear a deterioration in the quality and independence of US economic data, and 29% are concerned about potential restrictions to capital market openness. At the same time, 74% believe the euro will benefit from global macroeconomic and geopolitical shifts over the next five years.
However, others are more sceptical about the idea that the dollar’s position is under threat. Mark Sobel, US chair, OMFIF, cautions against writing the dollar off too quickly, suggesting that short-term market movements are being mistaken for structural change. Geoffrey Yu, senior EMEA markets strategist at BNY, supports this scepticism and says, ‘We believe that talk of comprehensive liquidation of and diversification away from US assets is marginal at best’. He argues that the dollar will remain the default, and that other currencies will have to earn their higher status.
Looking beyond the dollar
The question now is what alternatives might fill the gap if the dollar’s status weakens. For the time being, the options remain limited. Herbert Poenisch, senior research fellow at Zhejiang University, points out that most cross-border financial transactions are still conducted in major currencies, particularly the dollar. Despite growing calls for de-dollarisation, there is still no coherent institutional framework to support a credible replacement. Brics currencies continue to face major constraints, including limited convertibility, shallow markets and a lack of trust.
That said, Christopher Smart, managing partner of Arbroath Group, points to digital assets not just as a financial innovation but as a geopolitical risk accelerant. Their emergence is intersecting with political populism and weakening trust in institutions, particularly in the US. What began as a libertarian pushback is now feeding into broader backlash, with bitcoin framed as ‘digital gold’ in an era of dollar doubt. Without a clear strategy from liberal democracies to shape and regulate this space, Smart warns that, while digital assets may not shift the global balance of power on their own, they will distort and accelerate shifts in economic and political power.
On the demographic front, diversification is also playing out through Japan’s growing appeal. Jesper Koll, global ambassador and expert director, Monex Group, Japan, argues that a weaker yen, shifting geostrategic dynamics and a more confident stance from domestic leadership are putting Japan back in the spotlight. As de-dollarisation accelerates, Japan is emerging as a serious alternative to the US and investors are under pressure to develop concrete investment strategies in the country.
Europe presents another potential alternative. Pierpaolo Benigno, professor of monetary economics at the University of Bern, and Edoardo Reviglio, visiting senior research scholar at Yale Law School, argue that there may be a window for the euro to rise, but only if Europe delivers on meaningful institutional reform. They stress that the debate is no longer about whether a European safe asset is needed, but whether the European Union is prepared to deliver one – and on what terms. For any safe asset to rival US Treasuries, it must be built on a foundation of fiscal responsibility, credible repayment mechanisms and clearly defined rules.
The rising role of gold
Investors and reserve managers are acting more cautiously, and this is shown in the return of gold. Michael Paulus, head of public sector banking, Asia, Alberto Torres, head of public sector banking, LATAM, Sunil Kaushik, head of precious metals solutions, APAC, Natalie Tsui and Tobias Cheung, public sector banking, Asia at Citi, explain that gold has reclaimed its role as a core reserve asset, largely because it is not tied to any single sovereign and is increasingly viewed by central banks as a reliable hedge against volatility and geopolitical risk.
From a historical point of view, Harold James, Claude and Lore Kelly Professor in European Studies at Princeton University, highlights that the current shift mirrors past periods of geopolitical stress. Before the first world war, countries rushed to build up gold reserves to secure borrowing power and prepare for conflict. Today, as global tensions rise, central banks are once again increasing their gold holdings in search of protection from instability and politically exposed financial assets.
As investors and reserve managers navigate this uncertainty and debate whether the dollar is truly in decline, one thing is clear – the assumptions that once underpinned its dominance can no longer be taken for granted. Resilience is being redefined, and the focus is shifting towards alternatives. However, this doesn’t mean abandoning the dollar but rather managing the risks around it more deliberately and being prepared for what might come next. The dollar still leads, but the world is no longer following without question.
Yara Aziz is Senior Economist at OMFIF.
