International currency status is akin to an endowment of natural resource wealth. It can be managed well, in which case it is an asset for current and future generations, or it can be managed poorly, in which case it becomes a curse. It can be managed like either Norway’s natural gas or Venezuela’s oil, in other words.
Today the national currency that ranks first among equals is, of course, the US dollar. It is the financial grease in the wheels of 21st-century globalization. But this very fact creates a tension between US monetary and financial policies, which seek to advance America’s national interests, and the dependence of other countries on the international financial services provided by the US dollar.
How the US manages its monetary inheritance we are about to see.
Cracks in the foundation
Start with the underlying economic position. There is uncertainty about the prospects of the American economy and its weight in the world. The United States no longer commands the global stage as it did after World War II, or even in the 1970s when Bretton Woods met its maker. This implies that the country can less reliably supply safe and liquid assets, in the form of US Treasury securities, on the scale needed to meet the demands of the rest of the world.
America’s troubled fiscal and financial outlook is a second concern. The dollar has been attractive to central banks as foreign reserves, and to corporate treasurers, sovereign wealth fund managers and other international investors because it is available in ample amounts while broadly holding its value. The United States has skated on the edge of the Triffin dilemma — it has successfully provided a steady supply of dollars to meet the liquidity needs of an expanding world economy without supplying so many as to erode confidence in their value. But if this has been true until now, it is still possible that US fiscal and financial woes could push the dollar over the edge.
‘A less powerful United States would command less monetary and financial support from its alliance partners.’
Another danger to the dollar lies in prolific US use of sanctions. When the government imposes financial sanctions, foreign property within its reach is blocked or frozen. Although title remains with the owners, they lose access, and income accruing to the asset is held in a blocked account at a US financial institution. The sanctioned entity is barred from doing business with American financial institutions and other US entities. US sanctions bite because foreign governments, banks, firms and individuals are accustomed to holding liquid balances in US Treasuries, US commercial bank deposits and custodial accounts at Federal Reserve Banks, all of which an executive order can block at any time.
Geopolitical foundations
This reminds us that geopolitical alliances and power also matter for international currency status. The Dutch guilder came into widespread use in Asia when the Dutch East India Company was established not just to trade but also to undertake military operations. Sterling was the invoicing and settlement currency for the world’s trade and the dominant unit in global financial transactions when Britannia ruled the waves. The German and Japanese governments supported the dollar in the 1960s, helping to preserve its international currency role, because of the value they attached to their defense alliance with the United States. Saudi Arabia agreed to accumulate and hold US Treasuries in the 1970s because of the value it attached to US military support. Today the Bank of Korea holds a larger share of its foreign reserves in dollars than its trade and financial connections with the United States would lead one to expect, again as an implicit quid pro quo for US troops stationed on the peninsula and America’s broader security guarantee.
In the German, Japanese, and South Korean cases, official support was encouraged by the implicit threat that the United States might cut back its military commitments if its balance of payments and dollar exchange rate weakened further. This shows how a country possessing geopolitical leverage can nudge its allies and dependencies to hold and use its currency. It shows how, even without the explicit application of such leverage, they may willingly opt to use that currency, insofar as they are most comfortable relying on the currency and financial markets of an ally.
Russian opposition to the US invasion of Iraq in 2002 and to US air strikes against Syria in 2012, which prompted the Bank of Russia to begin diversifying its foreign reserves away from the dollar, illustrates the converse, namely the reluctance of a country to hold and use the currency of a geopolitical rival.
A less powerful United States would command less monetary and financial support from its alliance partners. US defense spending, which undergirds that power, is constrained by the same budgetary imperatives, a combination of limited revenues and costly entitlement programs, impinging on other public programs. US Defense Secretary Pete Hegseth’s 2025 plan to cut the US defense budget by 8 percent in each of the following five years is indicative of those pressures. The dollar’s international role would also suffer were the United States decisively perceived as turning its back on those alliances, already on shaky ground. US President Donald Trump has cast doubt on continued US participation in NATO. Vice President JD Vance, at the 2025 Munich Security Conference, shocked America’s allies by challenging the Western values providing the basis for the North Atlantic alliance.
Hegseth warned his European audience that the continent could no longer rely on the United States to guarantee its security. Trump allied himself with Vladimir Putin, imperiling Ukraine and alarming European countries bordering Russia. Next came the disastrous Oval Office blowup between Trump and Ukrainian President Volodymyr Zelenskyy, leading European governments to conclude that the United States was no longer a dependable alliance partner. European governments stepped up their military spending and support for Ukraine in recognition that they could no longer count on their old friend. The notion that alliance politics are important for international currency status was about to receive a real-time test.
‘No other currency, now or in the foreseeable future, is positioned to fill the dollar’s shoes.’
In the end, the fate of the dollar will rest on the willingness of America’s leaders to uphold the rule of law, respect the separation of powers, and honor the country’s commitments to its foreign partners. It will depend on the readiness of the Congress, the courts and the public to hold their feet to the fire. Ironically, it had been questions about the separation of powers and the ability of an autocratic leader to arbitrarily change the rules of the financial and political game that have held back the renminbi as a challenger to the dollar. The tables turn.
The costs of isolation
Isolationism is having a moment. The same currents that cause US commentators to question the desirability of America’s contribution to NATO and argue that the costs of the alliance exceed its benefits similarly cause them to question the value of the dollar’s international currency role and again suggest that the costs exceed the benefits. The Western defense alliance and the dollar’s role in facilitating international transactions are global public goods. They benefit not just the United States, the country that as the leading economic and military power is disproportionately tasked with providing them, but also its partners in NATO and the global economy. Other things equal, US policymakers would prefer a world in which other beneficiaries bore a greater share of the cost of supplying these security and financial services. This is what debates over NATO burden sharing and US international economic competitiveness are all about.
But this is different from saying that the United States would be better off without NATO, or that it would be better off were the dollar to lose its international currency role, as sometimes contended by those who worry about the costs to the United States of providing these global public goods. The dollar’s status as the leading international currency allows US banks and firms to do cross-border business in dollars. This offers convenience but also a competitive edge, since it eliminates the need to account for exchange rate changes when doing international business or to buy financial instruments as hedges against currency risk.
It allows the Treasury Department to borrow at lower cost, given foreign demand for dollar-denominated securities. It provides the US with built-in insurance against economic and financial shocks. So long as the liquidity of the US Treasury bond market is unsurpassed, making the dollar a safe haven, foreign investors will rush into dollars in times of turbulence, supporting US financial markets when they most need support. US strategic leverage is enhanced insofar as foreigners rely on the dollar, since this reliance is what causes US financial sanctions to bite.
Against this are the costs to US exporters from a dollar exchange rate that is stronger than otherwise. But a stronger exchange rate is way down the list of factors affecting the international competitiveness of US firms. It ranks below the modernity of the capital stock, the skills and training of American workers, the quality of entrepreneurship and management, and investment in research and development. If the level of the dollar creates headwinds for US exporters, they can take other steps — invest more in plant and equipment, train their workers better, develop new products and processes — that offset those headwinds. It is much less clear how to offset loss of the dollar’s global role, which would create other problems, such as a need to purchase hedging instruments, raise Treasury borrowing costs, add to the volatility of US financial markets and lessen the effectiveness of financial sanctions.
While attempting to quantify this wide range of factors is daunting, there is little doubt that the benefits of the dollar’s international currency status swamp the costs.
1930s all over again?
No other currency, now or in the foreseeable future, is positioned to fill the dollar’s shoes. While backed by a capable central bank, the euro still lacks a European Treasury and a supply of safe assets adequate for the needs of an expanding world economy. There are technical fixes for these problems, but implementing them requires political will and consensus, which in Europe are in short supply. China has the economic size, and the renminbi has the international reach, required of a global currency. But while the renminbi is used to invoice and pay for a majority of China’s own imports and exports, the currency is a bit player globally. It can be questioned whether China’s political system, which assigns unchecked power to the president and State Council and denies full independence to the central bank, is compatible with elevating the renminbi to global currency status.
‘If the stability and terms of access to those dollars were uncertain, banks and firms would move away from relying on dollars of their own volition.’
A multi-currency platform supporting the interoperability of central bank digital currencies could in principle provide an alternative to the dollar and the US banking system for settling cross-border transactions. But to constitute a full-fledged alternative to the dollar, global agreement would have to be reached on the architecture of that platform and on its governance, something that remains far-fetched. The leading candidate, Project mBridge, is a China-led project, in which the United States and its allies would likely not participate. Rather than providing a global contender to the dollar, this platform would only appeal to countries with which China is geopolitically aligned.
What then happens if, for reasons rooted as much in US politics as economics, there is a crisis of confidence causing the dollar to lose its safe-haven status and international currency role?
Central banks, no longer regarding dollars as safe and liquid, would no longer willingly hold them as reserves. Lacking the wherewithal to act as dollar lenders of last resort, they would not permit banks and firms under their purview to borrow and use dollars for financing investments and making cross-border payments. If the stability and terms of access to those dollars were uncertain, banks and firms would move away from relying on dollars of their own volition. With no other currency able to fill the void, central banks would hold fewer reserves, limiting their ability to intervene in international financial markets. Banks would be less able to lend across borders. Firms and governments would be less able to borrow. There would be downward pressure on the volume of cross-border transactions of all kinds. This would spell the end of globalization as we know it.
There is a precedent for this scenario — the disastrous 1930s. Three successive US banking crises sparked a crisis of confidence in the dollar, causing central banks around the world to liquidate their dollar reserves. They attempted to shift from dollars into gold, but found that there was only so much gold to go around. Sterling still served as a source of foreign reserves, mainly to the bloc of British allies and trading partners known as the Sterling Area, but this was not enough to prevent downward pressure on supplies of global liquidity. That pressure in turn compressed the volume of cross-border trade and lending, helping to spawn the Great Depression. This is a scenario that no one, not US policymakers, not policymakers in the rest of the world, should want to see repeated.
This article is an adapted excerpt from “Money Beyond Borders” by Barry Eichengreen. Copyright © 2026, used by permission of The Wylie Agency LLC.
