The dollar serves three crucial roles in the international financial system. First, it is the leading currency for facilitating global trade and capital flows, with over 50% of global trade and cross-border claims invoiced in dollars, even though the US makes up just over 13% of global imports.

Second, the dollar is the predominant currency held in official reserves, although the share has been declining. In 2024, the dollar made up 58% of global foreign exchange reserves, a decrease from 65% a decade earlier.

Third, the dollar is the preferred currency for the private sector as a store of value, particularly during economic shocks and periods of risk aversion, even when the crisis comes from the US, as seen during the 2008 global financial crisis.

These three roles are all connected through geopolitics and the global macro economy. It would take significant changes in the international landscape to challenge the dollar’s dominance. The key questions now are whether the US still wants this role, whether the world still has faith in the US having this role and whether there is an alternative to the dollar at this juncture.

Does the US still want this role?

Stephen Miran, the chair of President Donald Trump's Council of Economic Advisers, wrote a paper in November last year (before his official role with the Trump administration) arguing that the dollar's role as the world's reserve currency is not a privilege but a costly burden that has significantly contributed to the deindustrialisation of the American economy and the large trade deficit.

Although this paper is not an official policy document, it made a number of suggestions including tariffs as leverage to negotiate a weaker dollar by selling foreign exchange reserves and extending remaining debt holdings to help manage Treasury yields.

That said, there are strong reasons for the US to want to continue this role, and Trump has been clear about his intention to preserve the dollar's status as the world's reserve currency.

The dollar’s ‘exorbitant privilege’ allows the US to consistently spend beyond earnings, while benefitting from relatively lower borrowing costs. Moreover, it is not clear that the dollar's current strength is at all related to its status as a reserve currency. Over the past decade, this status has slightly declined, even though the dollar has appreciated.

Does the world still have faith in the dollar?

Trump’s tariff policies, criticisms around dollar strength from within the Trump administration, concerns around the Federal Reserve’s independence, unpredictable US foreign policies and the use of the dollar as a geopolitical tool have all dented the dollar’s hegemonic role.

An increase in the term premium of US Treasuries (which could suggest a structural shift in demand) or a disorderly decline in the dollar would be the clearest indicators that the process of US disinvestment is gaining momentum and that this is not just a ‘dent’.

Figure 1 shows that the term premium on US 10-year bonds has been falling alongside the dollar since January 2025, so the bond market is not pricing a ‘buyers’ strike’ on US bonds.

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Figure 1. 10-year bond premium has been falling since January
Dollar and term premium on US Treasuries. Data as at 15 May 2025.

Source: Bloomberg, Federal Reserve Bank of San Francisco, Capital Strategy Research

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Meanwhile, the selling of the dollar has been orderly, with minimal repricing of dollar premia. Figure 2 illustrates the cross-currency basis for potential alternatives to the dollar. Investors use the Japanese yen heavily in foreign exchange carry trades and so that should be the first to show any repricing related to the dollar losing reserve currency status. So far, there are no indications of this being priced.

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Figure 2. No indication yet of investors turning to currency alternatives
Cross-currency basis for potential alternatives. Data as at 15 May 2025.

Source: Macrobond

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Is there a viable alternative to the dollar?

While the dollar’s share in global reserve assets has declined over the past couple of decades, this has not been offset by increases in the shares of the other ‘big four’ currencies — the euro, yen and sterling. Instead, there has been a rise in non-traditional and, in many cases, higher-yielding currencies.

One non-traditional reserve currency that has been increasing its market share is the Chinese renminbi, accounting for a quarter of the decline in the dollar's share. Although the renminbi is backed by the world's second-largest economy and provides access to extensive foreign exchange and financial markets, the country’s strict capital controls limit the renminbi’s role in global finance.

The euro is often seen as another potential alternative to the dollar but there is a shortage of high-quality euro-denominated assets that international investors and central banks can utilise as a store of value, and there is no euro area-wide ‘safe’ government-backed asset available.

Reserve managers require access to highly liquid, reliable and deep capital markets. While many countries may wish to relax their dependence on the dollar, its dominance as the global reserve currency will persist unless deeper and more liquid capital markets develop outside of the US.

Has the tide officially turned?

The dollar has been overvalued for almost a decade on fundamental valuation models, but it is too soon to conclude we are now in a period of dollar weakness. We would need to see a sharp drop in US growth (or recession) and/or a significant increase in growth in the rest of the world for this to take place.

Meanwhile, although several of the foundational elements that have contributed to the dollar’s reserve currency status over time have been compromised, they still remain fundamentally sound, both in absolute terms and compared to other viable options.

So, while we could see the dollar weaken further from current levels, we are unlikely to be at a major turning point of the dollar’s bull cycle.