Is US Dollar Hegemony at Risk?

Trust in the US Dollar is Main Risk

The US dollar remains the world’s dominant reserve currency because of its liquidity, institutional credibility, and central role in global trade and finance. However, Donald Trump’s use of tariffs and financial sanctions could undermine the trust supporting that dominance. The key contradiction is the Triffin paradox: reducing US trade deficits may also reduce the global supply of dollars. A sudden collapse is unlikely, but continued policy unpredictability and economic fragmentation could gradually accelerate diversification away from the dollar.

The US dollar remains the dominant global currency, despite shocks such as COVID-19, the Russia–Ukraine war, sanctions, inflation, and Federal Reserve interest-rate hikes. However, these events—especially the expanding use of financial sanctions—are encouraging countries in the Global South and elsewhere to reduce dollar dependence and develop alternative payment systems. China’s renminbi and infrastructure such as CIPS are advancing, but remain far smaller and less attractive than the dollar-based system. A gradual move toward a multipolar monetary order is possible, though not imminent.

The dollar still dominates global finance: it accounts for about 88% of foreign-exchange transactions, 58% of official reserves, and 42% of global payments. Dollar dominance is weakening gradually, particularly in official reserves (Central Banks), which fell from 71% in 1999 to 58% in 2022. The euro remains the second-most important international currency, while the renminbi’s role is growing but remains limited by China’s closed capital account and incomplete convertibility. Western sanctions on Russia may have become an example of “sanctions overreach,” motivating countries to seek alternatives to SWIFT, CHIPS, and dollar settlement.

China’s CIPS, bilateral currency swaps, digital yuan, and wider trade relationships could support de-dollarisation, but these alternatives currently lack the scale, liquidity, openness, and trust of the dollar system. Another possibility is that the West could slow fragmentation by using sanctions more selectively and giving the Global South a greater voice in international monetary institutions

• Dollar dominance provides the US with significant financial advantages and global influence.
• Tariffs aimed at reducing trade deficits conflict with the need to supply dollars to the world economy.
• Weaponising financial systems and pursuing unpredictable economic nationalism may weaken international trust.
• No immediate alternative—such as the euro or renminbi—can fully replace the dollar.
• The most likely outcome is gradual diversification into multiple currencies and regional currency blocs.

The road ahead

The future of the dollar will therefore depend less on whether another currency suddenly replaces it and more on whether the United States preserves the conditions that made the dollar indispensable. Those conditions include open capital markets, predictable institutions, respect for contracts, credible monetary policy, and a willingness to provide liquidity during periods of global stress.

If Washington continues to treat trade, investment, and access to the financial system primarily as instruments of political pressure, foreign governments and companies will have stronger incentives to reduce their exposure. They may increase holdings of gold, develop alternative payment systems, settle more trade in local currencies, or build regional financial institutions outside the US-led system. Each individual step may appear limited, but together they could gradually erode the network effects that sustain dollar supremacy.

The danger is not necessarily a dramatic “collapse” of the dollar. A more plausible scenario is a slow decline in its relative importance. The dollar could remain the leading reserve currency while accounting for a smaller share of global reserves, trade invoicing, and cross-border finance. In that world, the United States would still possess considerable power, but its ability to borrow cheaply, impose sanctions, and shape international economic rules would be reduced.

This process could also impose costs on the rest of the world. A fragmented monetary system would make trade more complicated, increase exchange-rate risk, and potentially reduce the efficiency of global capital markets. Countries might gain greater autonomy from Washington, but they would lose some of the convenience and stability provided by a common financial centre.

For the United States, the central lesson is that monetary power is not guaranteed by size alone. It rests on confidence. That confidence can survive ordinary political disagreements and even periods of economic weakness, but it is harder to preserve when policy becomes erratic or when access to the financial system appears conditional on political obedience.

The dollar’s position is therefore neither invulnerable nor immediately threatened. Its greatest strength is the absence of a fully credible substitute. Its greatest weakness is the possibility that US policymakers may gradually convince the rest of the world that dependence on the dollar carries unacceptable political risks. The currency’s future will ultimately be determined not only by America’s economic performance, but also by whether other countries continue to believe that the benefits of using the dollar outweigh the risks of relying on the United States.