"The Foundations Of Dollar Dominance Are Weaker than Anticipated..."

Authored by Christoph Gisiger via themarket.ch,

Economist Barry Eichengreen is one of the foremost experts on the global financial system. His new book examines 2,500 years of international currency history. In this interview, he discusses the fading hegemony of the dollar, outlines the coming global monetary order, and explains his growing concerns.

King Dollar is staging a comeback. Since the start of the Iran war, the greenback has been in demand as a safe-haven asset. The losses following the price slide at the beginning of the year against the Swiss franc, euro, and other major currencies have been recuperated.

Yet, although the dollar accounts for around 60% of global foreign exchange reserves and dominates more than half of world trade, its hegemony appears more fragile than ever.

"From the war in Iran to the tariff chaos and domestic political uncertainty, I fear that the Trump administration's actions are prompting the rest of the world to reduce its dependence on the dollar; “most obviously in Europe but elsewhere as well"

- Barry Eichengreen.

This is the conclusion reached by Barry Eichengreen. In his new book, "Money Beyond Borders: Global Currencies from Croesus to Crypto" , the US economist examines the long history of international currencies, from ancient coins to blockchain technology. He demonstrates that the same factors contributing to the widespread use of a dominant currency ultimately lead to its replacement.

As the professor at the University of California, Berkeley, and profound expert on the global monetary system argues, the dollar is now on the downside of this cycle. A major reason for its downturn is that political institutions in the US are weakened, including high public debt and attacks on the independence of the central bank. Likewise, America is no longer a reliable partner for international alliances.

“To me, the argument that the dollar is in a secular decline as the dominant global currency remains intact,” says Eichengreen.

In this wide-ranging interview, which has been lightly edited for length and clarity, he applies historical examples of leading currencies to the present and identifies potential winners and losers should intensify the flight from dollar assets.

Contrary to increasing doubts, the dollar has proven itself as a safe haven since the start of the Iran war. From a historical perspective, what are the central characteristics of a global reserve currency ?

There are some commonplace arguments about the foundations of an international currency. They typically center around the importance of economic size, commercial trading, preeminence, and economic and financial stability, including the stability of the currency itself. In my book, however, I also advance some unconventional arguments; domestic factors such as rule of law, separation of powers, central bank independence as well as representation for investors and creditors. Furthermore, I examine the role of international politics and the importance of alliances, which until recently haven't gotten the same attention.

What can be derived from this for the future of the dollar? Does the current recovery mark a sustainable turnaround? Or does the long-term downward trend that began in autumn 2022 remain intact?

I would anticipate a further decline because we have learned something new and important from the last year and a half: that those domestic political institutions in the United States are weaker. They're more fragile than we had concluded in earlier, more complicated years. Consequently, I think the foundations of dollar dominance are weaker than previously anticipated, and that the dollar is likely to continue ceding market share globally over time.

Why are aspects like the rule of law and strong, independent institutions important for a global reserve currency?

They are a key pillar of every dominant global currency in history, all the way back to the Roman Republic where the senate was composed of property owners and other elites who were interested in monetary stability. In political democracies, citizens maintain the power to vote out governments that fail to preserve monetary stability. So I worry that observers look at the United States and ask: if Donald Trump chooses to put his signature on dollar bills today, and then seeks to debase or devalue the US currency tomorrow, who is going to stop him? Will Congress stand up to him? Or the courts? It's very worrisome.

Within the Trump administration, however, it is argued that the dollar's function as a global reserve currency is a burden for America. How did this play out with previous leading currencies?

History suggests that widespread global use of a currency can have negative side effects. The currency tends to be stronger than it would otherwise be, which can create headwinds for domestic industry and exporters. You saw this in 13th- and 14th-century Florence, in the 17th-century Netherlands, and arguably in early 20th-century Britain. So I wouldn't dismiss it entirely, but a currency's value on the foreign exchange markets ranks about tenth on the list of fundamental factors determining the competitiveness of a country and its economy. Far more important are education and training of the workforce, investment in the capital stock and infrastructure, the innovative capacity of the economy, and the legal framework as I just mentioned in the context of the United States today.

What consequences does this have for the financial markets ?

At the beginning of 2025, all the discussion was about a “Mar-a-Lago accord,” the “debasement trade,” and the idea that the US might do something to devalue the dollar. This undermined the dollar's appeal to foreign central banks, corporations, and investors because they faced the risk of capital losses on their dollar-denominated assets. More recently, the discussion has shifted toward geopolitical uncertainties. For Europe, for example, it has become increasingly important to be more self-sustaining, more sovereign over its money and finances. This includes reducing dependence not only on the dollar itself, but also on the US correspondent banking system and the SWIFT network.

Nevertheless, the dollar's recovery has surprised many market participants in recent weeks .

The point I would make regarding the dollar's apparent recovery so far in 2026 is that in the first two trading days following the outbreak of the war in Iran, the currency strengthened by approximately 1.5%. That reaction was typical of the dollar's role as a safe haven, but 1.5% was a small gain by historical standards given the magnitude of the shock. Against the backdrop of this geopolitical and military turbulence, the surprise is that the dollar has not strengthened any more. So to me, the argument that the dollar is in a secular decline as the dominant global currency remains intact.

You mentioned at the beginning that military supremacy was one aspect of a leading currency in the past. How important is this factor?

Looking back at the 2500-year history of international currencies – from ancient Greece to the Roman Republic to the Dutch Republic to when Britannia ruled the waves in the 19th century –, economic or commercial power and military security have always gone together. They have always combined to support the cross-border use of the currency of that preeminent commercial and military power. Today, it seems that this kind of geopolitical leverage has two elements: first, you must possess a vast arsenal of planes and missiles; Second, you must also have a coherent military strategy. For instance, the Dutch East India Company was not only a trading power but also, de facto, a military power that secured the Low Countries' ports in the Dutch East Indies.

How does that stand today, considering the US actions in the Middle East?

It is evident that the US government lacks a solution for ensuring safe maritime traffic through the Strait of Hormuz. So the fact that the US has a lot of planes and missiles is not sufficient. You have to have a coherent strategy, and that strategy should have, number one, a coalition of countries behind it – that's where alliance politics come in again – and a coherent objective. It's clear the US lacks those two elements in the present instance.

What is a historical example of how a reliable alliance policy promotes the status of a global reserve currency?

The best example is the United States itself after World War II, when the dollar durably became the dominant global currency. We provided dollars to our allies through the Marshall Plan and helped to build NATO in order to strengthen our political relations with those partners. So in the 1960s, when the dollar pegged to gold at $35 an ounce came under pressure, the governments in Japan and Germany supported the dollar because they were our alliance partners, relying on the US for military and geopolitical support. That underscores the intersection of geopolitics and global finance in cementing international alliances. We were a trustworthy alliance partner which solidified the dollar's role.

Today, that is no longer so certain. President Trump describes NATO as a paper tiger and threats that the US could withdraw from the alliance. As an economist, what do you think about that?

The importance of not succumbing to the temptation to think like an economist. We are trained to look for a coherent strategy on part of the US administration; and that also applies to maintaining the global role of the dollar. At one point last year, Trump has threatened the risk of increased tariffs on other countries if they moved away from the dollar. But almost the next day, he reiterated his desire for the Fed to cut interest rates and suggested how a weaker dollar would be good for the US. So I don't think there is really a coherent strategy here. From the war in Iran to the tariff chaos and domestic political uncertainty, I fear that the Trump administration's actions are prompting the rest of the world to reduce its dependence on the dollar; most obviously in Europe but elsewhere as well.

In your book, you also explain how superpowers in the past overextended themselves financially with military spending, which ultimately led to the decline of their currency. How great is this risk for the US, especially as President Trump wants to massively increase the military budget in the next fiscal year?

In 2021, I published a book with co-authors called «In Defense of Public Debt» . Between then and now, my view of the debt situation in the US has grown darker. I've modified my views in light of interest rates that are significantly higher today, as they make the US debt situation increasingly problematic. And now, we're on top of that more military spending. Given the deep political polarization, Congress is unable to reach a durable compromise that would begin closing the budget deficit. On all those grounds, continued high polarization, increased military spending, and higher interest rates, the debt trajectory is more troubling. This will be a powerful factor affecting the decisions of central bank reserve managers and others as they determine which currencies to hold in their portfolios.

But then the question arises: what are the alternatives? China, for example, is investing heavily in expanding its military power, but the renminbi's share of global foreign exchange reserves remains low and has even declined slightly recently.

The Chinese economy is continuing to grow faster than the US economy, and other countries use the renminbi in their trade with China. However, politics are an obstacle to China's aspirations to internationalize its currency and establish it as a true first-class rival to the dollar. So the questions regarding US politics apply to China even more powerfully. China lacks the separation of powers, and the rule of law is subject to whatever the Politburo and the president decide tomorrow morning it should be. Furthermore, there is no central bank independence. Since I don't see China's political system changing anytime soon, I doubt central banks and corporate treasurers around the world feel comfortable about parking their reserves in renminbi in Shanghai, in Chinese banks.

The independence of monetary policy is also a hot topic in the US right now. What can be expected from Kevin Warsh as the next head of the Federal Reserve?

I don't have expectations yet because he has a mixed track record, and his signals have been conflicting. He urged the Fed to tighten early during the global financial crisis, which would have been premature. He also had questions about quantitative easing during the global liquidity and deflation crisis when it was essential. More recently, he has flipped from supporting higher interest rates to calling for lower ones. Assuming he gets confirmed, he will be caught between a rock and a hard place. The hard place is that inflation will be going up to more than 4%, if you believe the OECD, and the rock is Donald Trump.

Which is the greater risk for the Fed regarding the rise in energy prices: an inflationary surge or a slowdown in economic growth?

The answer depends on your view of whether the energy shock and the rise in inflation are temporary or persistent. If the shock is temporary, the Fed should look through it and refrain from raising interest rates because inflation will subside. However, if the shock persists due to the war, the Fed must raise interest rates to dampen down inflation and preserve its credibility. It can't achieve anything else, including fighting unemployment, if it doesn't maintain its anti-inflationary credibility first in the face of a permanent price shock.

Let's try to look a bit further ahead. What can be learned from 2,500 years of international currency history about the future of the financial system?

If we have enough time, a few decades, I could envision a smooth transition in which the dollar's dominance declines toward a more multipolar global monetary and financial system. The dollar might then share its global role with other major currencies such as the Chinese renminbi as China opens its financial markets and deepens its financial systems' liquidity. The euro could also gain prominence, if the European Union achieves three objectives: completing the capital markets union, building a defense capability commensurate with dominant currency status, and moving towards the issuance of EU bonds, serving as the bedrock of euro-denominated portfolios. The third step, issuing more EU bonds, would require amending the Treaty of the European Union, which is hard to do. Additionally, digital technologies can make non-traditional reserve currencies better tradable. This includes the Swiss franc, the South Korean won, the Australian dollar, the New Zealand dollar, the Singapore dollar, and the Scandinavian currencies. These could complement the currencies of the major economies, at least on the margin.

In this context, what are the prospects for cryptocurrencies like Bitcoin?

Blockchain and distributed ledger technology represent an important innovation, offering alternatives to the dollar by providing payment rails that can be used to move tokens denominated in various currencies across borders for international transactions. The question is: what will run on those rails? Will it be plain vanilla cryptocurrencies like Bitcoins, stable coins, central bank digital currencies, or tokenized bank deposits? I would bet on a combination of central bank digital currencies and tokenized deposits. For example, there are lots of deposits in Swiss banks that can be tokenized and used for cross-border transactions through efficient distributed ledger technologies.

And what about gold? Central banks have been increasingly diversifying their reserves with the precious metal for several years.

Gold is there, although I would not expect its role to grow. You can only use it in financial transactions when it's stored at the Bank of England, the London Metal Exchange or the New York Fed. Yet, many central banks have been repatriating their gold for security reasons. Once repatriated, gold becomes sterile: it cannot be swapped or used as collateral for international financial transactions. So, we've learned in the last few weeks that the price of gold can go down, not only up; that it's a volatile asset and risky to hold.

What happens if there isn't enough time for a smooth transition to a more broadly diversified monetary system?

This is where my book ends. If confidence in the dollar is lost abruptly, there will be no alternative at scale, at which point interest rates will rise sharply and the liquidity needed for cross-border trade and finance will dry up. Essentially, 21st-century globalization would be at risk under such a scenario.

What probability would you assign to such a scenario?

The dollar's dominance is much like a massive iceberg melting slowly due to global warming. This process typically occurs at the edges and proceeds gradually, but a large chunk can suddenly break off. Figuratively speaking, the danger lies in the possibility that this melting could accelerate dramatically in response to external events, triggering a collapse. I cannot provide you a probability or a date, but I can share my feeling that we're closer to this nightmare scenario than at any other time in my life. I think we should all be much more worried than we have been in the past.

What should investors take away from this conversation?

I have to have two bits of advice. The first is that investors should read more history with an eye toward understanding the differences between the present and the future from the past. History repeats in different ways; studying it allows investors to discern unique shifts in economic structures and politics within the current conjuncture. The second bit of advice comes from my dissertation advisor, who was James Tobin at Yale. He won the Nobel Prize in the early 1980s for his contributions to portfolio theory. During his press conference on winning the prize, a reporter asked him to explain portfolio theory in non-technical terms. Tobin responded simply: “Don’t put all your eggs in one basket.”